Many -or I should say, most -microcap stocks are early stage developmental companies with little more than an idea. Unfortunately, hype for a product or technology often clouds the reality of subpar management and lack of a bonafide business model to move the company forward. That said; not all companies trading on the Over the Counter markets lack direction or skilled, responsible management. The problem is that most of these companies fly well under the radar of retail investors because they don't self-promote and institutional investors steer clear simply because they're an OTC stock.
Cemtrex, Inc. (OTCQB:CTEI), with 225 employees led by CEO SaagarGovil, who was recently honored alongside Google's NeenaNadkami and the Detroit Tigers pitcher Joe Nathan with a "40 Under Forty"Award by Stony Brook University, looks to be one such company that had a strong 2014 to build on a solid 2013. From a stock standpoint, shares slowly and steadily climbed on relatively low volume from around 30 cents in January to a high of $1.04 in July before sliding back to find a technical support at 60 cents currently. Is Cemtrex the most exciting company developing some high-tech electronic gadget or a cure for cancer that captures speculative investors attention? Absolutely not. But, the diversified technology company is custodial with its cash and curating growth organically and through acquisition strategies that have it operating profitably and generating significant revenue, facts that elude most OTC firms (and plenty of Nasdaq and NYSE MKT companies for that matter).
Through its wholly owned subsidiaries (ROB Cemtrex GmbH and Griffin Filters), Cemtrex offers a litany of products and services through two distinct divisions: Electronics Manufacturing Services (EMS) & Environmental Products & Systems (EPS). Amongst other things, the EPS arm offers continuous emissions monitors and instruments for industrial processes and environmental control and air filtration systems for industries and utilities. These products are designed to allow customers to monitor emissions in order to remain in compliance with government regulations. The EPS arm also markets turnkey solutions for oil and gas markets, including process analyzers for refinery applications to measure crude oil and natural gas properties and provide process optimization.
The company sells air filtration and environmental control products through its Syracuse-based subsidiary Griffin Filters LLC. Griffin Filters said in October that it is seeing increased demand for air filtration products underscored by the booming oil and gas boom industry in the U.S. This is because hydraulic fracturing, or "fracking,"generates air pollution through processing of frac sand, including post wash drying of the sand, screening, loading and unloading of railcars, barges and trucks. Energy companies need the sand to hold shale fractures open while oil and natural gas flow out. Griffin is gleaning from some significant orders that it can continue to expand its existing sales channels as the US premium sand sector is expected to experience double-digit growth in 2014.
The emissions monitoring solutions are intriguing to watch going forward given the heightened awareness of environmental impact. President Obama has been on a mission to cut greenhouses gases and other pollutants, including supporting the proposal brought forth in June by the Environmental Protection Agency to cut national carbon emissions by 30 percent from existing power plants by 2030. The proposal is meeting its fair share of headwinds, with coal industry advocates (who will be hardest hit by a change in mandates) contesting it will cost jobs and raise electricity prices. Apropos, despite a decline in carbon emissions, the Energy Information Administration reported in October that emissions from burning fossil fuels (coal, natural gas, oil) rose 2.7% in the first half of 2014, compared to the same period a year earlier. To wit, look for increased pressures to monitor and control emissions in response to the increase as it could derail the U.S. from its 2009 goal of 17% reduction in emissions from 2005 levels by 2020. That goes without mentioning the negotiated deal between Obama and China's premier, Xi Jinping in November where the world's two biggest economies agreed to reduce their greenhouse gas outputs. That agreement includes China for the first time ever putting a cap on emissions and the U.S. accelerating its reduction in carbon emissions to between 26% and 28% from 2005 levels by 2025.
Because of the regulatory posturing that accompanies things like emissions, not just in the U.S., but worldwide, the emissions space is a challenging one. That's why the diversification through the acquisition of ROB Group was a prescient move by Cemtrex to grow shareholder value.
ROB is the cornerstone of Cemtrex's EMS business, a company doing $30 million in annual sales that Cemtrex acquired in Q4 2013 for about $5.6 million, a deep discountto book value. ROB is a 25-year-old full service provider of electronic manufacturing services of custom engineered printed circuit board assemblies. ROB consists of four distinct operating companies, forming a complete electronics design, manufacturing, assembly, and cabling solutions provider that serves the electronics and cabling needs of some of the largest companies in the world in the medical, automation, industrial, and renewable energy industries. ROB Group delivers its manufacturing services through its facilities in Neulingen, German and Sibiu, Romania.
In a world where investors are used to hearing about heavy premiums for acquisitions, Cemtrex seems to have gotten a deal in buying ROB Group as the company was languishing financially and needed an exit strategy due to a insolvency debacle because a customer defaulting on a large payment. With favorable, non-dilutive terms, via a bank loan that carries only 3% interest and a 17-year repayment term, Cemtrex came in and bought the company at roughly half of ROB Group's book value. To avert any such payment debacle from happening again, Cemtrex has put in place a policy that all orders and receivables are covered by a major insurer.
The fastidious acquisition translated to Cemtrex generating $47.65 million in revenue in the 12 months ended September 30, 2014, a 249% increase versus $13.67 million in the year prior period. Net income was up a stunning 834% to $2.69 million, or 7 cents per share, compared to net income of $288,497 in the same period a year earlier.
Shares of CTEI have bounced around lately between $0.60 and $0.74, but even taking the high end of that range equates to a market capitalization of only $30.04 million. Moreover, Cemtrex can be evaluated in a way many OTC companies can't: through a TTM price-to-earnings ratio, which at $0.74 equates to a P/E ratio of 10.6:1 for Cemtrex. At $0.64, the P/E ratio drops to 4.7:1, according to data from QuoteMedia.
Looking at the Pollution & Treatment Controls industry shows and industryP/E ratio of 64:1. Now, to be fair, that figure is skewed upward by some foreign companies, but looking directly at US-listed comparables shows only MFR, Inc. (NASDAQ: MFRI) has a P/E ratio lower than Cemtrex at 4.9:1, in part because MFR swung to a net loss of $0.4 million in Q3 compared to a net profit of $7.4 million in the year prior quarter as sales decreased 24% to $43.8 million. Trading Tuesday at $7.41, shares of MFRI are off a March high of $17.44 by 57.5%. P/E ratios for other U.S. companies in the pollution treatment industry generally range from around 15:1 - 25:1.
The P/E ratio for the Industrial Electrical Equipment industry is25.7:1, with a similar structure to the Yahoo list and most in the area of 20:1. Yahoo has Cemtrex officially listed in the smaller industry of Industrial Equipment and Components where the industry P/E is 127.1:1. Even the broader sector of Industrial Goods has a P/E ratio of 19.9:1. Point here is to take a look at several surrounding industries, rather than the IE&C industry exclusively to demonstrate the valuation that can certainly be construed as on the low end compared to peers.
Cemtrex is building a marquee company specializing in advanced industrial and manufacturing technologies. The balance sheet is clean, albeit light on cash ($1.3 million in cash and equivalents), with $4.6 million in receivables as of September 30 and shareholder equity of $3.28 million. That equity has reversed course from a deficit of $916,000 in four years against the backdrop of 1,000% growth in revenue. With domestic and international operations, Cemtrex's business is scalable and ultimately still running well below capacity as it ramps up sales in very diverse, multi-billion dollar markets. The business model, high insider holdings (73%), growing profitability and customers such as Siemens, BP, Shell, General Electric, BASF, DuPont, Corning and Mitsubishi (to name a few) help mitigate risk and identify Cemtrex with class as an anomaly in the OTC world. Sporting a somewhat humble demeanor, the company will not skirt under the attention of Wall Street forever.
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