The towering figure of Value investing – Ben Graham – says on the page 589 of the 1940 edition of his monumental work Security Analysis:
Common stocks that (1) are selling below their liquid-asset value, (2) are apparently in no danger of dissipating these assets, and (3) have formerly shown a large earning power on the market price, may be said truthfully to constitute a class of investment bargains. They are indubitably worth considerably more than they are selling for, and there is a reasonably good chance that this greater worth will sooner or later reflect itself in the market price.

I feel that OPST which currently trades at $12.25 presents such an opportunity. OPST-founded in 1950- operates a niche business of providing anti-glare glass for aircraft cockpit display applications. It applies coatings to different types of glass face plates which are usually mounted on the front of LCDs and other types of displays in the aircraft. So basically their products enable pilots to read aircraft instruments in direct sunlight or at night. But its balance sheet glares at us. Tucked into OPST’s current balance sheet, among other items, are the following: • • • • Cash & securities : $9.2 million Account receivables :$1.2 million Inventories : $726 k Total liabilities : $394 k

Long term debt is absent. So deducting all liabilities from its liquid assets (cash + securities+ receivables) yields a value of $10 million that’s tad above its market cap which currently stands at $9.5 million. Or in other words, the stock quotes at $12 and has net liquid assets of around $12.95 So the company clearly trades below its liquid assets. And its operating business which the current market price has thrown in for free has delivered operating profits for the past straight 15 years. But first let’s run safety scores on it

Altman Z SCORE


Z score Ratios Working Capital /Total Assets Retained Earnings/Total Assets EBIT / Total Assets Market Cap/Total Liabilities Net Sales/Total Assets Z score calculation

90.22% 94.57% 8.80% 2408.03% 49.08% Points 1.08 1.32 0.29 14.45 0.49 17.64

A, B, C, D, E,

Working Capital/Total Assets Retained Earnings/ Total Assets EBIT /Total Assets Market Cap / Total liabilities Net Sales/ Total Assets Z- score

OPST total liabilities are just $3, 94,552. That’s very less for a company with $9.5 million market cap. Its ratio of market cap to total liabilities is very high and this boosts the Z score. Professor Altman devised Z score to check financial health of the companies. And he used this score to predict whether a firm is prone to bankruptcy. A score above 3 is considered safe. OPST’s Z score of 17.46 is excellent. We don’t have bankruptcy risk here.

Piotroski F SCORE

F-score 1 Net Income 2 Cash flow from Operations 3 Change in ROA 4 Quality of Earnings 5 Change in Debt leverage 6 Change in Current ratio 7 Change in Shares Outstanding 8 Change in Gross margin 9 Change in Asset turnover F score

1 1 1 1 1 1 1 1 1 9

The F score was devised by Josef Piotroski to weed out poor performers in the basket of cheap, bargain type of stocks .Collectively low price to book stocks performed well but individually their performance varied a lot .So Piotroski came out with a simple scoring system to measure financial strength and select the best among them. And any stocks that scored eight or nine points were regarded as being the strongest. OPST’s F-SCORE of 9 fits the bill. It shows an above average financial strength. BUSINESS QUALITY &EARNING POWER Below is the 10 year record of profits and margins:
YEAR 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 Sales $59,19,897 $48,99,983 $48,81,311 $67,48,591 $57,12,810 $42,65,396 $43,23,241 $40,67,838 $38,48,169 $41,91,377 Gross Profit $19,58,057 $14,55,672 $12,69,416 $22,82,819 $20,11,649 $12,46,678 $13,35,380 $8,60,509 $6,38,723 $7,29,809 Gross Margin 33.08% 29.71% 26.01% 33.83% 35.21% 29.23% 30.89% 21.15% 16.60% 17.41% Ope rating Profit Operating margin Free cash flow Free cash flow margin $10,61,356 17.93% $6,21,775 10.50% $6,27,089 12.80% $7,71,205 15.74% $4,89,051 10.02% $3,89,179 7.97% $12,73,162 18.87% $5,88,543 8.72% $10,87,707 19.04% $10,68,123 18.70% $4,62,962 10.85% -$1,32,181 -3.10% $4,08,613 9.45% $7,33,662 16.97% $2,13,004 5.24% $5,56,570 13.68% $12,921 0.34% -$1,87,678 -4.88% $83,047 1.98% $60,321 1.44%

The record is decent .The absence of any operating losses shows that operating business is not a cash –guzzler. OPST does custom manufacturing for its customers .And just 2 customers account for more than 65% of sales. Their customers build aircrafts and timing for order for glasses they place with OPST and their payment tenure could be quite erratic. It ships the product based on a customer's requested delivery date and not on its own ability to make shipments. Therefore, its free cash flow margins have been volatile. But the business has thrown tons of free cash. So in a strict sense the best measure for valuing OPST would be to use EBIDTAMAINTENANCE CAPEX.

And which over the years has been same as its EBIT. So EBIT would be a good proxy for this. Below is the table of past 10 year of EBIT /share (EBIT adjusted using GDP deflator)

YEAR 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 Average

EBIT /SHARE $ 1.37 $ 0.82 $ 0.65 $ 1.75 $ 1.54 $ 0.68 $ 0.61 $ 0.33 $ 0.02 $ 0.13 $ 0.79

That’s an average of $0.79 /share. The enterprise value is $0.35 per share. So EV/10 year average EBIT comes out to be 0.44 And that’s cheap relative to its earning power. RETURN ON CAPITAL OPST is a very asset light business that requires very low capital infusions. Here is the 10 year record of return on capital or invested assets which I calculate without deducting current liabilities and hence more conservative. Current liabilities as you can recall are basically interest free loans given to the company by the suppliers. The formula used is EBIT/Total assets – (excess cash & securities + intangibles)

YEAR 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

EBIT $ 10,61,356.00 $ 6,27,089.00 $ 4,89,051.00 $ 12,73,162.00 $ 10,87,707.00 $ 4,62,962.00 $ 4,08,613.00 $ 2,13,004.00 $ 12,921.00 $ 83,047.00

Invested Tangible Assets $ 26,52,233.00 $ 23,23,541.00 $ 23,99,364.00 $ 28,04,257.00 $ 22,21,129.00 $ 20,82,464.00 $ 17,60,048.00 $ 20,23,499.00 $ 22,38,852.00 $ 25,23,240.00 $ 23,38,494.00 AVERAGE

ROC 45.68% 26.14% 17.44% 57.32% 52.23% 26.30% 20.19% 9.51% 0.51% 3.55%


Most of the net –nets earn terrible returns on capital employed which is a good enough reason for their depressed stock prices. OPST has cranked out solid returns on invested capital over the 10 years. But that’s not because it’s an insanely great business. It’s because it employs very small amount of assets-relative to its total assets- in its operating business. The rest is held in cash and securities. It’s unable to redeploy its earnings to get a good overall return. Putting it specifically, its current tangible equity is $11.7 million but around 80% of this equity is held in cash and securities which earn paltry returns. That’s around 20 % invested in operating business. So it earns very low return on equity in the range of 3% to 6%. And one of major reasons the stock trades cheap. One can say the management doesn’t have a good capital allocation strategy. But then in this case I prefer this to a management that becomes ambitious and takes foolish decisions and squanders this capital. And it’s wishful thinking to expect the company to earn more than 6% return on equity over the coming years. But then there is a very high probability too that its assets are apparently in no danger of dissipation.

Management The major stake in company –around 66%-is owned by a trust for the benefit of Arthur J. Kania's children. His daughter is a beneficiary and her husband Mr. Anderson McCabe, has served OPST’s CEO since 1986. That’s another reason for the depressed stock price.

As their 10-k’s rightly says:
“Such concentrated control of the Company may adversely affect the price of our common stock. Because of the high percentage of beneficial ownership, the Trustee of that Trust is able to control matters requiring the vote of stockholders, including the election of our board of directors and certain other significant corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other stockholders and us. This control could adversely affect the voting and other rights of our other stockholders and could depress the market price of our common stock. If you acquire common stock, you may have no effective voice in the management of the Company.”

This keeps activist investors at bay. And another ick factor is that the company hasn’t paid out any dividends.


OPST’s revenues come from very limited number of customers. Around 64% of sales come from just two customers. And 95% of their sales comprise of instrument glass used for avionics and related aerospace products. So customer concentration and product concentration pose risk. Their customers, who are aircraft manufacturers, rely on OPST’s accumulated experience and know-how in satisfying their instrument glass requirements. That’s a competitive advantage. In 1998 the Company was selected to supply the anti-glare optical filters for the space shuttle avionics upgrade program. Since the product quality that is required in this industry is quite high and the company is proven, it’s highly probable that its customers would not switch to other vendors. But that’s just a probability. No one is immune in this industry. The company is an approved vendor for several major aircraft programs and major supplier for the anti-glare face plates covering the flat panel displays on the Boeing 777 and the 737 Next Generation models of commercial aircraft, the long range Gulfstream and Falcon business jets and the Embraer E series regional aircraft. They are also an approved vendor for instrument glass used on several military aircrafts. Here we have a small business type operation where CEO, who is also the president, shares a direct relationship with customers.

As their 10-k observes:
Our principal sales executive is our President, who maintains regular contact with the largest customers and continually seeks to develop new customers. We do not currently employ the services of manufacturer's representatives or sales personnel.

Since their products are incorporated into very expensive new aircrafts, the lack of a strong global economy may also result in reduced demand for their products. And that means an investor would have to embrace patience. Mr Market was also very fearful regarding the business prospects of OPST in 2010 As the company stated in its 2009 10-k:
Most of our commercial aircraft display products are for use in Boeing aircraft. The impact of Boeing's sales on the Company is difficult to project with a high degree of accuracy. The Boeing 787s scheduled for delivery in 2010 will utilize proprietary cockpit displays of Rockwell Collins which currently does not purchase instrument glass from us for these kinds of displays. Future upgrades of Boeing commercial aircraft may utilize the Rockwell Collins system.

But the company continues to be a major supplier for the antiglare face plates covering the flat panel displays on the Boeing 777 and the 737 Next Generation models of commercial aircraft. A quick peruse of Boeing’s 2011 annual report would reveal that their sales of 777 and 737 are robust. Below is the excerpt:
Won 805 net commercial airplane orders, including a record 200 orders for the 777, and 150 firm orders for the new 737 MAX; backlog grew to 3,771 airplanes valued at a record $296 billion. And James McNerney, the CEO of The Boeing Company says in latest 10-K that: Likewise, customer response to our launch of the 737 MAX was swift and positive. In only four months, we received more than 1,000 orders and commitments for this new engine variant of the single-aisle 737, which will be 10 to 12 percent more fuel efficient than today’s 737 and cost significantly less to operate than its competitors. With development costs and risks far below an all-new airplane, the 737 MAX will provide customers the capabilities they want, at a price they are willing to pay, on a shorter, more certain timeline. This approach is an all-around winner for Boeing, too.

Who doesn’t like to save fuel? Another very crucial point that investors need to keep in mind is that the due to nature of the Company revenue recognition( as we saw earlier while looking at its

free cash flow margins) significant quarterly fluctuations in backlog and orders could make their sales and profits extremely volatile from quarter to quarter. For instance, their 2012 Ist quarter result showed 25% drop in sales. For investors this volatility is something to profit from rather than eschew. And investment in this stock could test one’s patience. But what’s obvious is that the OPST is worth considerably more than its current market price.

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