MOCON is a small company (make that very small – annual revenue for year ended 2009 was $26.6m) located in Minnesota. The company designs, manufactures, markets and services products to detect, measure and monitor gases and chemical compounds. It also provides consulting services. The company’s products are used for the detection, measurement and analysis of vapors and gases in niche markets ranging from foods and beverages to oil and gas exploration and industrial safety. Think – measuring moisture in your sealed bag of dry cereal to ensure the crunch.
Despite the company’s small size, it has facilities in Germany and China and sales representatives in Canada. The company also has a minority equity investment in Ireland based Luxcell Biosciences. This investment is partly targeted at research that would expand the company’s core competencies. Over half the company’s revenues come from international customers.
The company has no debt and has generally stayed that way. Sales have shown an upward trend over the past 5 years, with an understandable year over year drop of approximately 10% for 2009 compared to 2008. The operating profit margin as percentage of sales has averaged about 16% over the past 5 years. A conservative DCF analysis gives this stock a value of $13-$14/share. A recent run up in its price has left it in this range. If the company manages to grow its net operating profit after taxes at a rate of about 1%, a very achievable target based on historical results, the shares should be worth $16-$17. The company should be worth more to a potential acquirer.
MOCON has paid quarterly cash dividends without interruption or decline since 1988. It currently pays out 0.095 per share every quarter and with the shares trading at $13.27 provides a yield of 2.8%; about 0.3% more than the current yield on 10yr. treasury notes. The company weathered the financial crisis without missing a beat. With cash and marketable securities of around 10.6m on the balance sheet, the dividend should be reasonably safe. Though the company’s sales will fluctuate with the broader economy,
it manufactures a product that is essential and not reliant on changing tastes or fashions.
One of the downsides to owning this stock is that due to the size of the company, the trading volume is low thus rendering the shares relatively illiquid and volatile. MOCON recently received a significant order from China’s State Food and Drug Administration. Though this would normally be considered a positive, this particular customer should give us pause. MOCON’s survival depends to a significant extent on technological innovation. The company spends 6%-8% of consolidated sales on R&D. For a small company, sales in a country where intellectual property has little or no meaning, and where even large deep pocketed corporations have trouble protecting their IP are a mixed blessing at best. Here’s to hoping that management does have a contingency plan in place to protect its IP.
Disclosure: Long MOCO