Prodex
Q1 2021
By Manuel Maurício
November 16, 2021
The other day, on my HireQuest update, I mentioned that I liked to own underfollowed companies.
But not this under-followed.
The extremely sparse information provided by the CEO Rick Van Kirk together with the lack of open discussion about Prodex on investment forums and fintwit hitches me.
Some will say that this is the type of behavior that makes you a worse investor; that the short term noise is just that, noise.
That might be true, I dunno. I guess I would welcome some more inputs.
On the opposite side of the behavioral spectrum is the fact that the stock has been down by more than 20% since I bought it and I couldn’t care less.
There’s great peace of mind in knowing what we own and in investing in good companies.
Let’s take a look at the numbers.
*If you’re new to Prodex, do read my previous write-ups. You can find them here.
The revenue in the first quarter of 2022 went up by 16% from a year ago. From the previous quarter, it went up by 6%. This is good.
There’s no seasonality to Prodex’s numbers so a quarter-over-quarter analysis might be more informative than a year-over-year one.
This growth was mostly explained by the growth in the sales of the surgical handpiece (orthopedic) a well as an increase in sales of the CMF drivers.
A not-so-good point was the decrease in sales of the new thoracic driver due to the “fulfilment of the customers distribution network“. Basically, the customer had bought a lot of drivers and hasn’t yet needed more. This is normal as customers tend to make a big purchase order when a new device is launched and then they’ll order on a regular basis a few quarters down the line.
The gross margin also went up by 1% from the previous quarter to 34%…
…and with lower operating costs, the operating margin has gone up to 13% from 6.3% in the previous quarter.
This has led to a growth of Earnings-per-Share to the current $0.3.
I liked the fact that, as the revenue went up, the Accounts Receivable went down. This means that after being squeezed by its largest client a few quarters ago, the company has been able to minimize the damage and reduce its Receivables Days.
This earlier collection benefited the cash flow for the quarter.
After using debt to buy back shares on the third quarter of 2021, the company still has the ability to draw an additional $1 million dollars from its credit facilities so I would’ve liked to see the board stepping up the pace of share repurchases at these depressed prices.
On other news, the CEO commented that, in the first quarter they “have been awarded several NRE projects (Non-Recurring Engineering) from new and exiting customers to provide proof of concept analysis on several handpieces and attachments”.
These scant words are all we get regarding the future prospects of the business. The cool thing about it is that Rick is now talking about several handpieces and clients, and not just one. I like this as it hints at diversification of revenue streams.
The company also states that they’re preparing to move to the new facility in the near future. This should help drive revenues higher.
Regarding the balance sheet, there’s not much to add apart from the extension of the maturity of the revolver loan from November 2021 to November 2023 in tandem with a reduction of the interest rate which should help boost profits.
PATENT INFRINGEMENT
Buried in the earnings report is news that one of Prodex’s customers sent notice that it’s seeking indemnification from Prodex regarding a pending complaint filed by a third-party claiming patent infringement on one of the products that Prodex manufactures for this customer.
The management states that, for now, their position is that there’s no infringement and that the patent at issue is invalid.
This is important to keep under close watch as these things have the potential to escalate and cause real damage to profitability. I’ll be sending an email to the company to try to figure out what real risks it poses, but I’m not counting on any material disclosures from them at this point.
CONCLUSION
There’s not much to be concluded from this quarter’s results. Everything is still much the same: a good boring business that’s a test to our patience. Going forward, I would like to see the company improving margins and not only revenues. In the meantime, Prodex will be kept in the Portfolio as a long-term position.
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