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In a volatile market driven by fear and greed, one can often find the best investment opportunities in the small and micro cap sectors. The lack of liquidity causes prices to fall apart in times of fear and gap up in times of greed. In this current market gripped by fear, those willing to look around can find great bargains with a low risk and just wait it out.

Paragon Tech Inc (OTCPK:PGNT) is one of these stocks. It’s a great company, with a long history, that has turned the corner back to profitability yet is so under the radar, that it still trades below cash and book value. Let’s take a closer look.

About The Company

Paragon Technologies, under the brand name SI Systems, makes material handling solutions, essentially tow line and conveyer belts. The two business lines, each roughly 50% of total revenue are:

  1. PGNT installs conveyer belts and work stations for the U.S Postal Service, Caterpillar (CAT), John Deere (DE), General Motors (GM) etc. on which these companies build their products (cars, motorcycles, forklifts etc.). From start to finish a forklift truck or car is built along a PGNT installed tow line where the machine being built can be moved up, down, sideways, etc. as mechanics build it out. The company’s website provides more information as well as pictures demos etc.
  1. Business line number two is a conveyer belt system that sorts small products such as lipstick, contact lenses etc. into boxes to be shipped to retailers for companies like Maybelline, Acuvue (contact lenses) etc. The company’s website for this product line provides a very informative look into company history, product lines, demos etc.

What I have described above is a pretty basic business that is easy to understand. PGNT has been doing business for more than 60 years and along with the great customer base I noted above, it has numerous patents and valuable software solutions.

Earnings

A link to the company’s recent results is here.

You can see that PGNT earned $0.29, $0.14 and $0.12 per share in 2005, 2006 and 2007 respectively. When the economy went into recession in 2008, PGNT lost ($0.28), ($0.33) and ($0.68) per share in 2008, 2009 and 2010, respectively. The negative effect on earnings stemmed form lower revenue and a reduction in the gross margin percentage as the company was unable to leverage its fixed costs as global capital spending slowed down. The point to note here is that PGNT was profitable during normal economies times. The company has made money most years since 1958 when it was founded. The second point to show now is that PGNT has turned the corner and earnings have turned positive again. The links below show that the company earned $0.05 in the first quarter of this year and $0.09 in the second quarter.

The difference this time around is that the company cut costs during the recession, instituted pay cuts across the board, improved manufacturing efficiencies and now, during the upswing, is seeing far better higher fixed cost leverage and having done $0.13 for the first six months, is back on track for earnings in $0.20 range once again for 2011. The main question now is: What are the key drivers for these earnings to continue? The answer is expansion of, and in, emerging economies. Companies like Caterpillar and John Deere are opening factories in emerging markets in Asia for growing countries like China and India and in South America for countries like Brazil.

  • On May 24, 2011, John Deere announced it would build a factory in China.
  • And in October 2010, John Deere announced expansion in Brazil.
  • In April 2011, CNH Global announced that it will build a factory in Argentina to make tractors.

In addition to some of the global expansion opportunities listed above, a ramp up in production from General Motors and Ford has helped PGNT turn the corner and should provide continued stable business. The one big unknown and potential huge contract will come from the U.S. Postal Service. USPS has been a customer of PGNT’s for decades, primarily outfitting the 21 bulk mail centers (BMC) with conveyer belts for moving and sorting mail. These centers are in need of repair and updating. According to an article in March 12, 2009 (see here), The Postal Service has abandoned plans to outsource the work performed at 21 Bulk Mail Centers, and instead will revamp the BMC (bulk mail center) network.

The last time PGNT updated a bulk mail center was in 2003; if and when the U.S. Postal Service gets its house in order, there is a strong possibility that it will reduce the number of facilities and update this smaller base, allowing PGNT to once again book orders in excess of $4 million to $5 million per center for this work over several years.

Margin of Safety

The best part of this story is that as of the most recent quarter (reported just a few days ago), PGNT has $3.06 per share in cash with no debt and a book value per share of $3.27. SG&A has been significantly reduced and the company is running on a tight budget.

So with all this said why the disconnect? Management and the board are allowing the company to fly well below the radar. In late 2009, the company de-listed to the pink sheets (to save money and avoid high reporting costs, Sarbanes Oxley etc). In late 2010, the company stopped issuing press releases and even stopped updating the news feed on the front page of its website - again, to save money. To see how PGNT is doing, one needs to find the earnings reports inside the company’s website under the tab “For Stockholders”.

There are no conference calls or any other promotional activity that would draw attention to the company. In the current form, if the company does very well or very poorly, the vast majority of the investment world would have no idea. It’s like the old saying….”If a tree falls in the forest…..”

Thesis

I am simply saying that this stock should trade for at least cash (currently a 35% increase in the stock price from the current level). The stock should probably trade higher than that, because this is a decent business and has to be worth something given its history and client list. I would imagine that shares of PGNT are currently worth somewhere between $3.06 (cash) and $4.25 (cash plus a little for the business). Having turned the corner to profitability once again, global capital spending announced and a great Fortune 500 customer base, there is value in this company that has simply not been unlocked. In my opinion, this company is flying below the radar

2 Possible Catalysts

Two possible catalysts are:

  1. Another strong earnings report that is actually issued in the form of a press release to the general public, not just on the company website.
  2. The Board finds a buyer and the company is sold.

Less than one year ago, the company hired an investment bank to look for a buyer, and also granted two Board seats to two large investors.

Source: Paragon Tech: Profitable Company Trading For Less Than Cash