SCI Engineered Materials (SCIA) (filings) manufactures "advanced materials for Physical Vapor Deposition ('PVD') Thin Film Applications". Almost exclusively the company works for multi-nationals. It claims their solutions are innovative and customized. Customers use the company's materials to "produce nano layers of metals and oxides for advanced material systems". End products range from everyday items such as in "automotive, transparent anti-scratch coatings on eyeglasses, coatings on kitchen faucets, as well as low emissivity glass for household windows". In addition the company's materials are used in "semiconductors, solar, flat panel displays, defense, aerospace, and photonics".
The stock is listed on the OTC Markets instead of on one of the major US exchanges. Though not listed on an official exchange the company still files with the SEC.
Not only this stock is among the best 3% in my nanocaps list but also it is among the best 38% in my low EV/EBIT list, at 0.3175 USD per share.
Multi-year metrics for judging earnings quality and asset allocation are pretty good. Because EV/EBIT is just too high the stock is not in my low EV/EBIT + quality list.
Red flag: customer concentration is very high. According to page 4 of the annual report the largest customer was good for 63% of the revenue in 2021 (75% in 2020).
During the last 5 years the company spent 1.6 million USD on research and development. A patent search returns 3 patents expiring in 10 or more years, one patent with priority date in 2008 and another one with priority date in 2009.
The balance sheet is very strong with low leverage, a high current ratio, lots of cash and no significant debts or lease liabilities.
On 3 February 2021 there were 4,506,269 shares. According to page F-16 of the annual report there are 20,243 employee stock options outstanding. These options will expire at various dates through 2024.
In 2021 the company paid a significant dividend for the first time. But this dividend was not paid to common stock holders. Instead it went to preferred stock holders as part of an agreement to redeem the preferred shares on 31 December 2021. Now the prefs have been redeemed it is more likely the company will initiate a dividend in future. I have not found any significant dilutions or repurchases.
Apart from the CEO there are 5 directors. One of them is already 85 years old and already a director since 1990. The chairman is Laura F. Shunk, the daughter of the founder Ed Funk. I do not think there are any formally independent directors, because that is not necessary for a company listed on the OTC. I think this board is OK, especially considering this is a very small company.
Substantial shareholders (page 10/11 of the proxy filing): chairman Laura Shunk 11.9%, director Emily Lu 3.1%, Daniel Funk (probably a son of the founder) 9.4%, outsider Robert H. Peitz 9.1%, outsider Curtis A. Loveland 6.4%, outsider Charles Kohnen 5.59%, Huntington Bancshares 6.08%.
Related party transactions (page 16 of proxy filing): The CEO, Mr. Jeremiah R. Young, is the son-in-law of one of the directors, Mr. John Gilliam. The chairman works for and is shareholder of a patent law firm. This firm represents the company in intellectual property law matters.
According to page 12 of the proxy filing the CEO earned 262k USD in 2020 and the CFO earned 179k USD. Variable compensation was about 15% for the CFO and about 20% for the CEO. Directors earned between 36 and 43k USD including 24k USD in shares.
My take: Cheap US-listed materials science company based on EV/EBIT and EV/Revenue. Also with good multi-year metrics for judging earnings quality and asset allocation. Moreover, in the last 5 years the company spent a substantial amount on research and development and it also owns a couple of patents. I have not found any major governance issues. There are good chances the company will either be acquired or will initiate a dividend or will do a big payout, some time. I think this is a good stock for a small position.
Disclosure: long SCIA.