Prodex
Q3 2021
By Manuel Maurício
May 13, 2021
ProDex is one of those companies which I’m proud of owning. I still pinch myself for not having bought more during the recent dip when it went to $22.
In fact, that dip clearly illustrates the shortsightedness of Mr. Market and its focus on the short term. The next time you hear someone tell you how the market is overvalued and how hard it is to find good companies at attractive prices, show them Prodex.
On the previous quarter the management talked about price concessions with the largest client and the At-The-Market authorization (read here to better understand this) that suggested that the board of directors viewed its own stock as overvalued.
Mr. Market was scared, but Mr. Rick Van Kirk (the CEO) had previously gone through the same issues and he was able to masterfully extract process improvements and get those gross margins back to the high 30’s.
Regarding the ATM, I love that the company has one in parallel with a share repurchase program.
Let’s take a look at the relevant metrics:
Revenue went up considerably to a record $11.7 million.
I believe this was due to 2 factors: 1) the success of both the thoracic driver and the new Craniomaxillofacial driver…
…as well as 2) the picking up of the delayed activity in Q1 by their second largest customer (which I believe to be DePuy, a division of Johnson & Johnson and sole client of the thoracic driver).
The gross margin, the big concern for Mr. Market 3 months ago, was up again to 37%. I expect it to go higher in future periods as some of the costs associated with the pandemic will be absorbed.
Although the revenue was at a record high, the operating income came down a bit from the previous record quarter (Q4 2020) because the company has been hitting the gas with increased expense in both Research & Development and Selling expenses.
Going forward, this profit will take longer to translate into cash because of the renegotiation of the collection period with the largest customer from 30 to 60 days. Right now I’m not too worried about this, although it has already influenced the debt profile (more on this in a minute).
To pay for the new plant (by the way, the opening has been delayed by one quarter), the balance sheet now has more debt, but the company remains conservatively financed with an interest ratio of 12x.
But what I liked most about Prodex’s results was the fact that the Board of Directors seized the opportunity of a scared Mr. Market and repurchased 4.2% of the total shares outstanding in one quarter AND – by my calculations – they bought another 1.4% in April. This means that the company bought back 5.5% of the total shares outstanding in 3 months!!!!!!
Ah! And Mr. Market was worried about the ATM.
This is what happens when you invest in companies whose directors own a fund called Farnam Street (Warren Buffett’s home address).
Not only that, but the company also sold some of its investments in stocks of other companies for a gain of $783K.
This is something you won’t find in every company. This is capital allocation at its best. Take note.
Just as an explanation for what I was referring to back there about how the collection period going from 30 to 60 days would influence the debt profile, the company raised an additional $3M to repurchase those shares. If the largest customer had paid within 30 days, this financing might not have been needed.
One notable missing element from this quarter is the status of the certification process for the CMF drivers in Europe. I’ll be sending an e-mail to the company to see if they can tell me something about it, although I doubt they will.
CONCLUSION
There aren’t that many companies in the world like Prodex. Great products, great management team, great governance, great capital allocation, and I dare to say, great future ahead. I really don’t know why I didn’t buy more when the price dipped. As a precaution, let me state it right now, I’ll be adding to my position if it comes down again to levels way under $30 (I’ll be posting a quick alert if that happens).
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