| Ticker Symbol | SCIA |
| Listed On | OCTQB |
| Website | SCI Engineered Materials |
| Address | 2839 Charter St, Columbus, OH 43228, United States |
| Year Of Establishment | 1987 |
| Founder | Dr. Edward Funk (deceased anno 2023) |
| Date of Diligence | 25 oktober 2023 |
| Share Price on DOD | $3.59 |
| Market Cap on 25/10/23 | $16.26M |
| PE-ratio on 25/10/23 | 8.31 |
| Shares Outstanding | 4.519.524 |
| Latest Annual Report | 2022 |
In concrete terms, the company is concerned with 2 main matters:
SCIA is engaged in the manufacture of tailor-made sputtering materials
to be inserted into the machines to carry out the sputtering process.
This is at the request of companies active in this sector.
Companies involved in sputtering are companies that apply thin layers
to all types of surfaces.
Just think of companies that are active in the production of:
The above list of types of companies all benefit from hiring a company
in the sputtering sector.
Or they do it themselves and apply
different types of thin layers on their products.
The purpose is to make them smoother, firmer, color them,
make them reflect, etc.
When applying the layers, different powders and raw materials are used to treat the surface of the product that has to be treated.
SCIA also offers these raw materials, which consist of powders and granules.
As indicated on the homepage, I screen companies based on certain conditions. These conditions take into account what a good company must meet. After I have set my stock screener so that it meets these conditions, I come across certain companies. SCIA was one of them.
During my search I did not come across any other companies with the required conditions that I consider important and are therefore competitive with SCI Engineered Materials. Hence my choice.
When people talk about sputtering, they want to make it clear that one or more layers are applied to a product using a specific technique. You can see the process itself via the following link:
or by watching this youtube-movie:
Upon further research via Google, I found that the growth of the sputtering market as a whole will grow between 5% and 7.2% annually. Depending on who conducts the research, it is difficult to estimate how much market share SCIA occupies.
What is certain is that the market is growing. The 3 core sectors that SCI Engineered Materials focuses on are photonics, semiconductors and the photovoltaic market. These markets are in full growth and so SCIA can certainly contribute to this. SCI Engineered Materials work closely with their customers to take the products in these 3 sectors to the next level. This obviously contributes to the growth of the sputtering sector.
I added a few links below that represents the growth in the sector.
As I mentioned earlier, SCIA has various intellectual property assets. These pending patents have been approved based on the business activities that SCI Engineered Materials carries out. These patents contribute to collaboration with their current customers and future customers. SCIA states in their annual report that their customers can also use this to promote cooperation between both parties.
Below is a quote from their annual report of 22:
"Our patent titled “Process for the Removal of Contaminants from Sputtering Target Substrates” (US Patent No. 10,138,545 B2) was issued on November 27, 2018. This provides a process for the removal of contaminants on a spent sputtering target used in Plasma Vapor Deposition.
We have the rights to multiple patents for technology related to the application of Zinc Oxide based Transparent Conductive Oxide in Displays. Our patent titled “Display Having a Transparent Conductive Oxide Layer Comprising Metal Doped Zinc Oxide Applied by Sputtering” (US patent No. 9,927,667) was issued on March 27, 2018; a related patent having the same title was issued on April 7, 2020 (US Patent No. 10,613,397), and we have a corresponding patent issued in Sweden. The transparent conductive oxides (TCOs) we developed in these patents have excellent electro-optical performance, high transmittance, high conductivity, and good chemical resistance. These patents have various applications that include LCDs, micro-LED, OLED, smart windows and mirrors, AR/VR goggles, e-papers, and wearable electronics. Our clients, in relevant applications, are entitled to use the patent number when referring to the devices covered by the patent and benefit from it. We believe the TCOs claimed and protected in these patents have wide and innovative applications which can put SCI in a unique position in the market as well as bring us additional business opportunities.
We also have an additional patent application pending in the US Patent and Trademark Office relating to specific technology that protects our processes used in achieving superior bonding in planar and rotatable targets which we intend to prosecute to issuance.
During 2016 we were granted a federal trademark registration for “SCI Engineered Materials”. We have additional rights in common law trademarks and services marks, as well as in our branding properties, including our blue logo."(Source: SCIA Annual Report anno '22)
A significant portion of SCI Engineered Materials revenues dependent on 1 costumer.
73% of SCI Engineered Materials' revenue comes from 1 major customer. This customer has been working with SCIA for 20 years and is therefore responsible for 3/4th of the revenue. SCIA also states that this concerns a customer for which no inked deals have been concluded since the start of the collaboration. Which means that if things go wrong between the customer and SCIA, there will be a recovery loss of 73%, which could ruin SCI Engineered Materials!
Now I have been thinking about it and upon reflection, taking into account the sectors in which both parties have been in for 20 years without contracts. It seems to me that the trust between both parties must be high. I can also imagine, given that SCIA has pending patents and therefore mainly in function of this customer. The customer cannot simply say goodbye to SCI Engineered Materials as a partner to work with.
Take for example that the customer (which I don't know who it is) is active in the photonics sector and is making progress with a certain product for which it needs SCIA who has "the patent" & knowledge. This customer could not just say goodbye to SCIA. This would also be a disadvantage for the customer's business process.
The only thing the customer can do is start their own production without SCIA's knowing. Which entails even more costs for the customer + a search for suitable personnel + the misuse of SCIA's intellectual property.
You see, 1 customer with a revenue representation of 73% is not nothing, on the other hand, both companies are already so intertwined that it is difficult to do without each other. Given the niche industry in which both parties are active.
The sputtering target market is subject to competition. There are companies worldwide that manufacture sputtering targets and the raw materials. Many of these companies manufacture sputtering targets as a sideline or are not listed on the stock exchange except for Materion(MTRN). For these reasons, it is difficult to determine whether or not these companies meet the parameters on which I select companies. Since they are not obliged to report their annual accounts to the Security Exchange Commission (SEC for short).
Below are some companies in America that are active in the sputtering sector and mainly do the same as SCIA (list is not complete):
Of the first three companies, SCI Engineered Materials itself indicates that they are its competitors.
See quote below:
"The market for PVD materials is substantial with significant competition in both ceramic and metal materials. While we believe that our products enjoy certain competitive advantages in design, function, quality, and availability, considerable competition exists from well-established firms such as Vacuum Engineering & Materials, Process Materials, Inc., and Materion, all of which may have more financial resources than us. We cannot provide assurance that developments by others will not render our products or technologies obsolete or less competitive."(Source: SCIA Annual Report anno '22)
Since it is the competition that SCI Engineered Materials is looking at.
With a Marcet cap of almost 2B, SCIA is a small shrimp compared to MTRN. It is also worth mentioning that Materion is not only involved in the sputtering process, but is also active in related sectors in performance materials made from beryllium that the company obtains from the ore mine a refinery in Utah and also the electronic sector. The advantage that SCIA has here is that it is not yet known to the general public. This allows it to move freely in the market. I can imagine that MTRN does not feel threatened by SCIA because of its "little shrimp" title. So in my view this is positive.
Now you may ask yourself why I don't choose this company over SCIA?
Well, as I have already said, I am looking for companies that meet certain conditions. Since Materion does not meet these conditions, it is not suitable as an investment!
The first impression of management is positive.
It is important to indicate that management must have been active in the company for several years. Therefore not in the same position, but involved in the company's activities for several years. Even more important is when management and/or directors have shares in the company. Which is the case here (see shares)!
When management or directors own shares in the company, this can indicate the fact that they believe in the activities that the company carries out and therefore benefit these people as the company grows!
The company announces that it owns 19.70% of the common shares. This means that according to the conditions we set in the search for a suitable company to invest in, we are 9.7% higher than the requirement of 10% insider ownership.
| Total Equity | Total Assets | Total Liabilities |
|---|---|---|
| $8.7M | $11.8M | $3.1M |
The ROE is above a minimum of 15% and the company therefore qualifies as an investment. The ROE was also stable in the last 2 previous years. So we assume that the company can achieve the same in the future. As long as this ratio remains above 15%.
We would like to see a ROIC percentage above 15%. SCIA has a percentage of 14.40%, which is just under 15%. The rule we impose on ourselves is that we achieve a minimum ROIC of 12%. SCI Engineered Materials also qualifies as a possible investment here. FYI: Higher ROIC percentages have already been achieved in the past.
We see that the DTE ratio is below 0.5% and this has been the case several times in the past. This fits in with our investment philosophy and SCIA therefore remains a suitable investment candidate.
We see that SCI Engineered Materials is at a loss of $4.1M.
A comment should be made here:
The gap is gradually closing!
In other words, the company is taking its responsibility and has been gradually paying back its past losses since 2017! This means that at the rate they are now making up for their losses, they will be back in positive waters by approximately 2025 and therefore the losses from the past will have been completely eliminated!
The FCF amounts is around $1.9M, which has fluctuated around this amount annually since after the corona pandemic. In itself the FCF does not want to say much. The positive thing is that there is money left after the company has met all obligations, including eliminating its Accumulated Defecit! Where it gets really interesting is when we put the FCF into a Discount-Cash-Flow method and we therefore calculate what the company will generate in the future. We do this very conservatively and create a DCF that is constructed with a large margin of safety!
The result of our DCF is: $27.88M
So we assume the company is currently worth $27.88M. We do make one important correction here. We take a Margin Of Safety into account and take the 27.88 and calculate 60% of this. Then we arrive at the amount of $16.72M and assume that the company is currently buyable when the company has a Market Cap of: $16.72M
At the time of writing, the company has a Market Cap of $16.26M and this amount is below the calculated $16.72M. We then divide 16.72M by the number of outstanding shares of 4.25M, which justifies a price of $3.69!
Now we wait until SCIA is around the price of $3.69 and buy our shares we want to purchase.
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