The Company announced blow out earnings last week, but only one side of the growth story of this company is even showing up in the financial results to date. SYNL reported first quarter results that produced an eye-popping 405% increase in net earnings to $3,525,000, or $.56 per share, on a 23% sales increase to $44,398,000. This increase was due to the metals business, where sales increased 37% in the first quarter of 2007 from the same quarter a year earlier and operating income surged 402% to $5,620,000. Also, the company generated a lot of cash in the quarter totaling over $6,000,000. Let’s first look at the metals side of the business.
The metal business has transformed into an energy piping play where it sells into growing energy markets including LNG (liquid natural gas), ethanol, petroleum, biofuel, power generation (including nuclear), waste water and electric utility industries. By moving towards these end markets SYNL has increased margins as it produces much more specialized products. The company has continued to invest in its production capabilities and capacity with additions completed in 2006 and expected in 2007 which should lead to continued growth.
Additionally, there has recently been a huge growth in these industries and the consolidation in the steel industry has become a regular occurrence for those of us who follow the industry. Recent deals in steel energy piping have had companies being taken out at huge premiums, which show you the interest in businesses like SYNL’s metals business. I see this side of the business to continue to grow rapidly and the recent profitability to be here to stay.
But the sneaky part of the SYNL story is the chemicals business which had a very average quarter where sales actually declined slightly overall (although it looked like the base business picked up as most of the operating income was made in the last month of the quarter which bodes well for Q2). However, there is a huge growth driver here that SYNL has been talking about and investing in that will start to pay off in the second quarter and beyond. The growth story here is that federal regulations will require ALL mattresses manufactured or imported into the United States after July 1, 2007, to meet the new federal standards which require mattresses to be more resistant to fire. SYNL has been developing and testing its products to take advantage of this opportunity and has partnered up with some solid partners (Leggett and Platt amongst others). From the press release it sounds like they have made great in roads into this opportunity:
Management remains confident in the potential success of its fire retardant products over the balance of 2007. During the first quarter, our Sleep-Safe products achieved successful results from required testing and plant production trials at several significant potential customers. Since Federal regulations will require mattresses manufactured after July 1, 2007, to meet the new Federal standards, we are anticipating an increase in revenues from these products to begin in the second quarter and grow to significant volumes steadily throughout the year. This source of anticipated new business together with management's expectation of continued growth in other products and based on current conditions in the general economy leads us to believe that the Specialty Chemicals Segment should produce improved results in the last 3 quarters of 2007.
I believe between the huge growth SYNL is seeing in its metals business, combined with expectations of significant growth in the chemicals side of the business through the balance of the year, SYNL will continue to put up strong revenue and earnings growth. With the small number of shares outstanding of around 6 million shares (roughly 5 million in the float) there is certainly the opportunity for huge earnings leverage from an EPS standpoint. Remember, the company just reported a quarter of 56 cents in EPS without the chemicals side doing much of anything. I would expect when the chemicals side starts contributing in Q2 and Q3 the EPS numbers should increase. I would think for 2007 SYNL could earn between $2.50 and $3.00 a share which would be over 100% from 2006. It’s hard to say what a fair value is for SYNL if it grows that fast, but I know it’s a lot higher than $35 a share.
Finally, one other tidbit on SYNL is that it is currently #12 on the IBD 100 and has been rumored to be a candidate for the #1 spot which it may well get when the volume undoubtedly picks up. IBD #1 or not, I think SYNL in the mid-30’s is a great buy. Expect significant price appreciation over the next 6-12 months as the story plays and out and gets discovered.
Disclosure: Author is long SYNL
SYNL 1-yr chart