Description

Epolin is the world’s largest supplier of near infrared absorbing dyes. These dyes are primarily used in products designed for protecting eyes from lasers (e.g., welding masks). However, additional markets include sunglasses, filters, automobile sun roofs and windshields, heat shields for the aerospace industry, and security inks for credit cards and currency.

Epolin’s business is rapidly growing and extremely profitable. Over the past five years, sales and earnings per share have grown at 12.5% and 29.7% per year, respectively; gross and operating margins have averaged 69.3% and 32.0%, respectively; and ROIC has averaged 20.3%. The past four years Cap Ex has accounted for only 2% to 6% of cash flow from operations, freeing up copious amounts of free cash flow relative to investment; for the foreseeable future, Cap Ex should continue to be very small relative to cash flow. Their balance sheet is squeaky clean with $1.6 million in cash and no debt; in fact, total liabilities are less than $0.6 million. Last year, Epolin initiated dividend payments, which, at today’s ask price, amount to an 11.9% yield. Management is encouraged about future growth due to the increased use of lasers in welding and the need for additional security with credit cards, as well as other developing uses of the dyes.

Epolin has an unusual, but very real competitive advantage. Larger companies have developed similar dyes, but, due to their much higher overhead expenses (Epolin has only eight employees and owns its facilities outright.), and the small size of the stand alone infrared dye market, competitors must sell resins or the final products containing the dyes, instead of the dyes themselves. Smaller companies don’t have the customer relationships or reputation to profitably enter the market. In addition, these dyes make up a very small portion of the total cost of the products that contain them, so there isn’t a lot of incentive for customers to switch dye suppliers or develop their own dyes. Since their inception in 1984, Epolin has never lost a customer.

Epolin is also a very good value at its current ask price:

Price: $0.67
EV: $6.33 Million
EV / Earnings: 8.2
Earnings / EV: 12.2%
EV / FCF: 10.5
Dividend Yield: 11.9%


In summary, Epolin is a rapidly growing very profitable company with a competitive advantage selling at a very reasonable price.

Catalyst

The large dividend yield of 11.9% makes the wait for an increase in market price a very profitable one.

Eventual listing on a major exchange would also increase market price.