The Business and Risk of Bolt Technologies
Quick Overview of BOLT as an Investment
My assessment of Bolt Technologies (BOLT) is summarized by the spider graph shown here.
Low Risk: The company financial statement is very easy to read and analyze. There aren’t any hidden derivatives or tongue twisting jargon to confuse you. The balance sheet is very strong with plenty of cash and liquid assets. The Seabotix acquisition was easily consummated for with the cash on hand and has not weakened the balance sheet.
When I first looked at BOLT, crude oil was in the low $70’s mark and as of July 22, 2011, it is now at $100. Like I mentioned in the first BOLT post, BOLT is a seller of equipment to help detect oil and so their profits do not increase in line with oil prices, but the increase in activity as oil prices increases is the catalyst for BOLT’s profits.
High Growth: Operating in a niche market, BOLT is not expected to have high growth. It grew substantially during the oil bubble in 2007 and oil is consistently near the $100 per barrel range which implies that the upside is still there. In terms of physical growth, BOLT grew its tangible book value by 17% from 2008- 2010. Going through multiple rolling time frames, this is the slowest rate that BOLT has grown over a 3 year period.
Undervalued: From the valuations that you will see below, BOLT is being priced at around a 30% discount.
Well Managed: People complain on the Yahoo boards that the management team is senile and out of touch. The numbers from my analysis suggests otherwise. Management could be all talk and no walk, but the numbers disprove this complaint.
Good Financial Health: No debt, plenty of cash, liquid assets. No worries.
Strong Moat: Within a niche there are not many competitors. Going through the financial statements, the numbers reveal that BOLT does indeed have a competitive advantage.
Financial Statement Analysis
Before going further, here are some links to help you master analyzing each of the financial statements and how to bring it all together.
- Master the Income statement
- Master the Balance sheet
- Master the Cash flow statement
- Detected competitive advantages through the income statement, balance sheet, and cash flow statement
Moving on, here are some noteworthy points from the latest 10-Q.
Balance Sheet Analysis
- $3.52 cash per share, which makes up 28% of the share price.
- Inventory increase of 22% from prior year, but if you analyze the inventory, most of that build up has come from purchasing raw materials. Because BOLT creates products once orders come in as well as supply parts to previous customers, BOLT does not hold much completed inventory. Work-in-progress makes up only 10% of total inventory. One way you can analyze inventories quickly is with the financial statement analysis spreadsheet you get with the premium package.
- The one bad thing that I see resulting from the SBX acquisition is the big jump in intangibles. It has from approximately 12% of total assets to 30%. Looking at the results for SBX, BOLT seems to have overpaid.
- On the liabilities side, short term debt is $6.9m. Long term debt is zero. With a quick ratio of 5.7 and current ratio of 7.8, no need to even worry about the health of the company.
Income Statement Analysis
- Gross margin of 50% for the past two years, and an average of 45% for the past 10 years is extraordinary and unheard of for most companies. But BOLT being the leader it is and being recognized for it, can increase prices. Definitely has a competitive advantage in its industry.
- The clean structure of the company allows BOLT to enjoy net margins above 15%.
- Tax rate is consistent at the 32-34% mark, so compared to previous years, earnings are not inflated by paying less in taxes. This is a point you want to take note of when analyzing the quality of earnings.
Statement of Cash Flows Analysis
- Clean Cash flow statement
- Only number that sticks out is the acquisitions figure under cash flows from investing activities
How Much is BOLT Worth?
Discounted Cash Flow (DCF) Stock Valuation
The DCF stock valuation method requires some assumptions and while it isn’t the perfect method, it is a very reliable and accurate tool if you keep it on the realistic to conservative side. The reason people get into trouble is because they fail to understand both the business and the industry when assigning a growth rate. Feel free to download a free copy of the DCF spreadsheet today.
For the past 10 years, BOLT has always been FCF positive with no debt or one time extraordinary items. The company is consistently profitable and has grown FCF at a staggering rate of 122% over the past 5 years and a blistering 57% over the past 10 years. Obviously, no matter how small and profitable a company is, this kind of number is impossible to duplicate year after year. Using this type of FCF growth in the DCF would produce astronomical valuations and be completely off.
Over the past five years, by taking a rolling median (i.e., comparing multiple timeframes rolling across different time periods and then taking the median), the CROIC (Cash Return On Invested Capital) is 11.5%. This means that for every $1 of cash invested in the business, BOLT has been able to generate returns of 11.5c . I like to see this figure in the 15% range, but 11.5% is still no laughable figure.
Another metric I like to use the FCF/sales. It shows how much of sales converts directly to the bottom line. In BOLT’s case, for every $1 of sales, 10% is converted to FCF. A company that has a FCF/sales above 5% can be considered as a good generator of FCF.
So not only is the business a money generator, management adds to the equation to make it even better.
Here are the assumptions to get a DCF intrinsic value.
- Starting FCF of $9 million even though 2010 brought in $12m
- 14% growth rate for the next 10 years with a terminal rate of 3%. Considering the strength and size of the company, these are very conservative numbers.
- 15% discount rate
DCF intrinsic value: $17.19. This is currently a 27% margin of safety based on conservative assumptions.
A reverse DCF valuation shows with the assumptions made above, the market is pricing BOLT with 6% growth.
Benjamin Graham’s Formula
This valuation is based on Graham’s formula from The Intelligent Investor, which I have made modifications to as shown below.
- Using a growth rate of 14% based on the median of normalized earnings
- EPS of $0.68 for the TTM EPS
the value comes out to be $19, which is a 34% discount from current prices.
Earnings Power Valuation
Based on Bruce Greenwald’s EPV method, the asset reproduction cost comes out to be approximately $6.29 per share which is an increase from $5.20 when I first wrote about BOLT. This is the value that a competitor will need in order to at least copy the assets to run a business similar to BOLT.
By calculating EPV, I get a value of $16, which is significantly higher than the reproduction value. This means that BOLT does in fact have a moat — the value of the business is worth more than the assets. If a company had no moat, the EPV would be roughly the same as the asset reproduction cost.
For more information on how EPV works and how to calculate it, be sure to read my EPV articles.
Net working capital is the approximate value the company would fetch in a fire sale or liquidation and can be considered to be the floor of the stock price.
A backtest on NNWC and NCAV stocks has shown how profitable net net stocks can be.
Use this free net net spreadsheet to calculate the net net value of BOLT.
- NNWC is $3.92
- NCAV is $5.19
Based on NCAV, the market is valuing the future of BOLT to be worth $7.44 (12.63-5.19=7.44).
Fair Value PE Model
In order to find a fair value PE using the absolute PE model, I’m deriving the number based on the earnings growth rate, dividend yield, business risk, financial risk and earnings visibility.
- Expected Earnings Growth: 14% (based on the values I’ve been using so far)
- Dividend Yield: 0%
- Business Risk: 0.9 (giving BOLT a 10% premium over competitors in this category)
- Financial Risk: 0.9 (giving BOLT a 10% premium over competitors in this category)
- Earnings Visibility: 1.1 (inconsistent EPS due to cyclic nature of the industry)
Compared with the current PE of 18.7, the fair value PE of 17.5 isn’t that far off, suggesting that BOLT could be fairly valued.
Comparing against 5 Competitors and Still on Top
Competitors compared against BOLT include:
- ION Geophysical Corporation (IO)
- Mitcham Industries (MIND)
- Dawson Geophysical (DWSN)
- Geokinetics (GOK)
- Baker Hughes Inc. (BHI)
By comparing the competitors side by side, you can see how well BOLT stacks up fundamentally against each one regardless of how big the competitor is. Compare the fundamentals of cash flow, FCF, margins, debt, current ratio and effectiveness, and BOLT beats every competitor hands down. It simply doesn’t get the love it deserves.
Time to Add it to the Watchlist
A lot of the times when I start writing an analysis for a company, I come across some glaring issues during the writing and I end up throwing the company in the rubbish pile. But every time I review the analysis for BOLT, I’m more than convinced that BOLT is an excellent company.
I sold back in April, but given the chance to add BOLT in the $10-11 range, I’ll be doing it in a heartbeat.