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Sutron (STRN): Worth a look

|Includes: Sutron Corporation (STRN)
A few months ago I wrote about TCCO as a great backlog play. Here is another one: Sutron (NASDAQ:STRN). STRN sells hydrological, meteorological, and oceanic data monitoring products for the management of critical water resources and for warning of disastrous floods, storms, or tsunamis.
Like all companies we invest in, STRN has a great balance sheet with a $1.70 in cash (25% of market cap) and no debt. Another key we look for is a company that is in a good industry going through some form of robust growth. Given the number of tsunamis, hurricanes, floods, landslides etc. around the world over the past several years the need for STRN’s products has never been greater. Infrastructure spending though government stimulus plans across developed nations (United States, Europe) and organic robust infrastructure growth in underdeveloped nations (India, China, Kenya, Afghanistan, and throughout South America) is keeping demand for these products robust.
So the first margin of safety; we have a company with a solid balance sheet going through a great demand cycle i.e., in the right place at the right time. STRN is small and nimble in size, a true “pureplay” (the company averages $18 million a year in revenue). This means that the smallest projects have an impact on the business and any larger contract has a huge impact. This is evident in recent earnings and backlog. In 3Q:09 STRN ended the quarter with $17mln of orders in backlog, the highest in several years. The next quarter the company reported $0.26 in EPS (significant for a $7 stock). The backlog then dipped back to $11mln for the next two quarters yet the company still reported solid year over year growth for the first six months as orders continued to flow in. For the last nine months STRN has reported $0.45. Now the backlog is once again elevated at $16.5mln close to a record which could result in another one or more robust quarters, especially given management’s bullish comments about the future. Here are some excerpts:
May 7, 2010: “With backlog as of December 31, 2009, of $11,908,000 plus the 2010 year-to-date bookings, that together total about $17,758,000, Sutron is on track to have another record year.”
May 17, 2010: “We continue to see many opportunities in our domestic business and to see funding of projects under the federal economic stimulus plan.”
Jul 20, 2010: “…. the significant year-to-date bookings are a promising sign of another great year for Sutron.”
Aug 11, 2010:  “Our orders and contracts backlog of $16,595,000 is at near record level going into the third quarter….we continue to see excellent opportunities both domestically and internationally. We are hopeful of winning several significant projects before year end.”
In my opinion, given the current uncertain economic conditions there are not many companies out there “hopeful of winning several significant projects before year end” and talking about a record year with an already near record backlog. If STRN is able to win any significant projects in the second half, I think the backlog will stay elevated and we will see several robust quarters from STRN, more cash generated and hopefully a special dividend, similar to what TCCO did ($2 special dividend).
So what does one pay for this: I modeled $0.64 in EPS for 2010 up $0.45 in 2009. At a current price of $6.60 subtract $1.70 in cash you get $4.90, divided by the expected EPS you get a PE of 7.6x forward earnings which is half of what the general market indices are trading at. So bottom line: A company with a solid balance sheet in an industry going through a robust demand cycle, an almost record backlog of essentially guaranteed orders can be bought at more than a 50% discount to the general market. A great example of an undervalued, under followed, undiscovered, great American “small business”.

Disclosure: Long: STRN