Prodex
FY 2021
By Manuel Maurício
September 31, 2021
Prodex posted a 15% decline in sales for its fourth quarter (ending in June) and Mr. Market is punishing it by paying 18% less for its stock.
Although it’s year-end for Prodex, the company hasn’t posted its Annual Report yet. It has only published the financial statements, so the data we have is somewhat limited. The Annual Report will come out on the 9th of September.
I could’ve waited until then, but given the price drop, I wanted to check if this could be a good time to buy more stock or if anything fundamental had changed.
The reason for the drop in sales is that, On the third and fourth quarter of 2020, the company launched two new products which had high initial sales volumes. Prodex’s customers typically order in higher volumes in the beginning of a product introduction.
The company says that, after 6 to 12 months of launch, the customers begin reordering “these products on a quarterly basis and the orders continue to help facilitate the year-over-year growth”.
So, it seems that there’s an initial pop when a new product is launched and then the revenue builds on top of previous years in a quasi-subscription- based model.
This reminds me of the great investor Phil Fisher. One of his 15 points to determine if a company was a good investment opportunity was the ability to come up with new, in-demand products.
From the beginning of 2020, the company has been hitting the throttle of its Research and Development investments.
In this industry, you don’t just start a project without a client asking you for a specific instrument to be created.
So, the higher R&D costs should mean that they’re seeing some good opportunities to develop new products together with their clients.
This higher R&D costs, together with the lower revenue, led to 73% dip in operating income.
Hence, the lower share price.
The last time the share price got so low (one quarter ago), the company seized the opportunity and raised debt to buy back 5% of all the shares outstanding.
I’d like to see more buybacks at these depressed prices as I don’t see the current weakness in revenue as something to worry about.
At the end of the quarter, the company had $3.7 million in cash plus $3 million in investments (mostly stock of other companies). They also had $2.8 million available on their credit facilities.
So, I really hope they’re buying back more stock. We’ll just have to wait and see.
In the meantime, I believe this to be a great opportunity to buy the stock.
The company is moving to the new facility by the end of the year – which will double its capacity, and very likely the revenue too – and it’s developing new products to sustain growth.
There’s still no mention of the CE certification of its new CMF driver, but when it’s done, we can expect materially higher revenue from that business.
Having said that, I won’t be buying more of it as the customer concentration is a real risk. In the previous quarter, 2 customers accounted for 85% of revenues. This is one of those risks that isn’t perceived as risk until it’s definitely a risk; until a customer decides to go with another Contract Manufacturer, or until a customer goes through such a rough time that it’s forced to squeeze everyone upstream.
Going forward, I would like to see the company reducing its dependency on these 2 customers. I’ll be sending an email to the management to see what they’re doing about it.
DISCLAIMER
The material contained on this web-page is intended for informational purposes only and is neither an offer nor a recommendation to buy or sell any security. We disclaim any liability for loss, damage, cost or other expense which you might incur as a result of any information provided on this website. Always consult with a registered investment advisor or licensed stockbroker before investing. Please read All in Stock full Disclaimer.