Description

You will find Sono-Tek very interesting in the current political environment. It's a solid micro cap company with a unique technology and a solid balance sheet. Fiscal 2017 performance was not up to expectations, but one of the main drivers of the reduced results was, as stated in the Company's most recent press release, "Some of the Company's opportunities in China have been negatively impacted by China's 2015 implementation of the "China First" policy that focuses on developing internal companies and products with government assistance."

I am not trying to make any political statement nor am I a supporter of President Trump, but perhaps this "America First" policy is not so nuts, after all. Sono-Tek is one of those ignored US manufacturers that is being materially hurt by unfair foreign trade practices. Perhaps, we should take a look at some of our trade agreements! And in this case it is costing American jobs. How many Sono-Teks are there out there? In this case Mr. Trump has a point!

But enough politics, let's focus on Sono-Tek. We have followed and been involved with this Company for many years and have been impressed both with management and the product. The Company was incorporated in 1975 to develop, manufacture, and sell ultrasonic liquid atomizing nozzles and systems. Now that's a mouth full! It's actually not that complicated. The Company has developed a proprietary series of ultrasonic nozzles and systems, which are being used in electronics, solar and fuel cells, medical devices, glass textiles and even food applications. These nozzles are electrically driven and create a fine, uniform, low velocity spray of atomized liquid particles. This is in contrast to common pressure nozzles. The Compny nozzles create a precise, uniform, thin coating. Relative to pressure nozzles, they provide a significant reduction in liquid waste, less overspray, lower environmental impact and lower energy usage. We refer you to the Company's website for a more technical discussion of the its technology. There are many papers and presentations, that will satisfy the curiosity of us engineers. 

During the past five years the Company has made a significant effort to enhance its product diversity. This has involved both increasing the portfolio of products and the number of countries served. In fact, in fiscal 2016 57% of sales were foreign. Given the preciseness and uniformity  of the spray produced by the Company's systems their systems are critical in such products as cardiac stents, solar cells, semiconductor wafers, hot glass, flame retardant clothing and anti-microbial coatings for packaged meats. 

The Company's systems are patented and in fact the Company received three new patents during fiscal 2016. The Company also relies on non-patented knowledge to produce their nozzles. In several emerging markets the Company encounters less competition given the uniqueness of its ultrasonic technology. 

Fiscal 2016 was a very tough year for the Company. Sales decreased to $9.7 million, an 18% reduction from 2015. The drop was mostly in the floating glass product. The strong dollar and the fore mentioned anticompetitive practices in China combined to hurt the Company. The Company expects significant improvement in fiscal 2018, driven by several new products and applications. And hopefully there will also be an improved regulatory and tax environment in the US. 

Sono-Tek expects to report a slightly better than break-even year in fiscal 2017 compared to $742,000 in pre-tax income last year and $826,000 the prior year. During fiscal 2017 the Company, intelligently, chose to continue its R&D and sales and marketing expenditures despite lower sales. The benefits of the spending are beginning to be realized in fiscal 2018 as first quarter of Fiscal 2018 (March-May 2017) is expected to be stronger than last year.

The Company's balance sheet is extremely strong and will allow the Company to expand. As of November 30, 2016 the Company had $3.6 million of net cash. A current ratio of almost 3.95, after netting out the debt. It has a book value of $.52 per share and $.24 per share of net cash. The finances are clearly not an issue.

Management owns about 20% of the outstanding shares. Emancipation Management LLC owns almost 15%. Management compensation is very reasonable but the Board is classified and a little "long in the tooth". Management has generally been responsive to outside shareholders and clearly has a long term emphasis and outlook.

So why do we like these shares at this time, given they just had a break even year and are trading at over 2 times book and at a nice multiple of normalized earnings?

1) We believe Sono-Tek has a superior product and technology with tremdous competitive advantages that have yet to be taken advantage of.

2) We believe the Trump Administration's policy is designed to specifically help companies  like Sono-Tek who are being screwed by China and other countries across the world.

3) The reduction in regulation and taxes will fall right to the Company's bottom line.

4) We see limited risk in these shares at the current valuation relative to their upside, if they are allowed to compete on a level playing field internationally.

5) We believe the shares do not currently reflect the value of its proprietary technology.

Catalyst

1) The Trump administration is successful in implementing more equitable trade agreements.

2) The Company is finally allowed to compete in a fair international playing field.

3) Given the age of management, the Company is sold at a nice premium.

4) The value of the technology is finally exploited and turned into earnings.