Description

Ikonics is a profitable growth stock with significant new patented niche products that have the potential to quadruple company sales in the coming years. The stock trades below liquidation value with some insider buying and an active stock buyback. Many thinly traded microcaps trade at silly valuations currently, but Ikonics offers a history of successful growth with the potential to make many multiples on your investment if their growth initiatives work out.

Ikonics has been in business since 1952. Historically they have made photo-resist chemicals and substrate for the silkscreen printing industry. In February, 2000, William Ulland became CEO and reorganized the company changing their name from Chromaline to Ikonics and listing the company on Nasdaq.  Many successful new products have been developed and marketed since then resulting in earnings per share as follows

2001:   ($0.26)

2002: $0.20

2003   $0.27

2004   $0.40

2005   $0.47

2006   $0.56

2007   $0.58

2008 (9mths) $0.33

Earnings in the last few years have suffered from increased expenditures on new product initiatives. Photo-machining, using Ikonics proprietary chemicals to mask brittle surfaces before blasting with sand to cut away unmasked material is the first initiative. The second is using ink-jet technology to apply proprietary masking chemicals in the manufacture of texturized molds for plastic injection molds. The texture on the dash of cars might be produced using Ikonics texturized molds for example. Ikonics management projects the market potential of their texturized molds business to be three times the company’s current sales. If these new products work out, the upside in the stock is quite high.

The downside appears to be well-protected. Book value per share is $6.26 and the 60,000 square foot building in Duluth that the company owns free and clear is carried on the books at near zero. This building is worth perhaps $4 million or $2 a share. The company has no debt. Additionally Ikonics carries an investment of $855,201 in privately held Imaging Technology International (ITI) on their balance sheet at the lower of cost and market value. They currently carry it at their cost. In 2008, Ikonics exercised warrants to buy additional shares at $8.50 a share. This may indicate that Ikonics believes their earlier investments in ITI at $6.85 and $7.50 a share are worth more than their balance sheet carrying value.

A risk with microcaps is that management uses the company to pay themselves salaries and isn’t concerned with shareholder interests. Ikonics is 34% owned by officers and directors and the CEO is 67 years old. Company salaries and stock option packages appear quite reasonable. There’s plenty of incentive to do the right thing for shareholders. The company bought back 75,000 shares at about $7 recently.

Ikonics core businesses are cyclical and earnings are likely to suffer from the current recession. The company’s balance sheet is clean so they will survive to have an opportunity to realize the potential of their new products.

Catalyst

New products