Schmitt Industries...Negative Scale?!?

I recently took a look at Schmitt Industries (SMIT on Nasdaq). After spending a few hours, I decided to pass.

Originally SMIT came on the watch list as a new 52 week low stock trading below tangible book value. Schmitt operates in two segments: Balancer and Measurement. The Balancer segment designs, manufactures and markets computer controlled vibration detection and balancing equipment, mostly in the machine tool industry. The Measurement designs, manufactures and markets laser-based surface measurement products.

In both segments the company is up against competitors with better resources and larger economies of scale, but that doesn't mean that SMIT wouldn't make a good investment.

Here is what the business performance has been on a consolidated basis.

It shows a company that on average will likely return its cost of capital (maybe lower) over a long period of time.

If we look at the P&L we can get more color regarding the company.

You can see that margins have been slowly eaten away. It now takes over 14 million in sales to squeak out positive EBITDA, where in the past anything over 10 million on the top line would produce 1.5-2.0 million in EBITDA.

In the past an increase in revenue has led to an increase in tangible book value per share. This is not the case currently. Tangible book value has been around $3 since Q4 2010, while revenue/share has climbed from $2.10 to almost $5.

Management owns a good chunk of shares, so I feel they are at least incentivised to do the right thing with the business. Compensation is reasonable and the board is independent. There is the risk of nepotism as the Case family has several members employed by the company. But I don't see any evidence of them robbing shareholders.

For now I will pass on SMIT. I will keep it on my watch-list and take a look if valuations drop to lower than what was seen in 2009. That would put a trigger at $2.45 or about 20% lower than today's price.

I would love to hear any opinions on SMIT.

Dean

Disclosure: No position