Oftentimes, the world’s most significant technology breakthroughs can be very small in size – too small to be seen by the naked eye, but bring an outsized impact on a particular industry. Take, for example, Sono-Tek Corporation (OTC: SOTK), an OTC traded, New York-based company that is developing a world-class alternative to traditional coating methods. Sono-Tek is not only challenging the large-caps but is already considered a global leader in the design and manufacturing of ultrasonic micron particle coating systems for depositing precise, thin-film coatings to protect or strengthen surfaces. Their innovative coating processes and products are allowing its customers to meet the demands in multiple market segments and are not only being used for industrial coating projects but are also being used to apply functional layers, such as catalyst or electrical function, onto parts and components.
Last week, the company posted a record net income of $1.1 million on sales of $15.3 million. Shares moved higher 12% on the report sending its market cap to more than $37 million as shares settled at $2.44 on substantial volume. Additionally, on a comparative basis, Q4 revenue increased by 88% over the same period last year alongside a strengthening in gross margins to 48%.
Leveraging the momentum into its FY Q1, the company noted that demand for highly specialized products in both the electronics and medical markets helped secure a record-setting year-end backlog of $3.5 million, up 16% over the prior year. The company also expects that its product line expansion, coupled with strong pricing, will generate an expected increase to its Q1 FY2021 sales of roughly 21% with measurable conversion of sales to operating income and earnings.
Those results offer a compelling value opportunity and a case for why Sono-Tek can create long-term shareholder value. Here’s why.
32% YOY Growth And An International Footprint
From a public market perspective, creating shareholder value is the golden rule. And, Sono-Tek is proving its ability to do so by posting impressive results from its fiscal year ending in February 2020. The company reported revenue growth of more than 32%, with those increases coming from more than half a dozen distinct market segments, and with at least 50% coming from outside of the United States.
Notably, Sono-Tek’s growth is coming from a diversified market, with semiconductor manufacturing and medical device manufacturing contributing to the company’s strong year. Perhaps more importantly, Sono-Tek is benefiting from global demand growth, with European and Asian geographies increasing their revenue contributions alongside strong U.S. Sales.
Also, Sono-Tek is showing a unique ability to adapt to fast-changing market demands with relevant products. The company’s original focus was on supplying fluxing equipment to printed circuit board manufacturers in the U.S. and Mexico. And, while that segment of its business remains stable, additional success is being generated from their expansion into the global markets that target potentially lucrative sectors including medical devices, semiconductors, clean energy (fuel cells and solar energy), coatings for handheld electronics screens, and industrial applications (glass, food, textiles).
Moreover, the company’s global presence helps usher in new opportunities, not only from specific sectors but also from worldwide events. As an example, the company recently noted that because of the increased demand for rapid medical blood testing due to COVID-19, they have been active in selling equipment to help facilitate that demand. That’s just one example. But, it proves a point and may help to develop long-term revenue streams based on the expected demand for the blood testing kits.
More than appreciating a new revenue stream, though, recognizing Sono-Teks’ inherent ability to quickly penetrate new market opportunities should also be a part of the overall value proposition. And, that ability to seize opportunity appears to come from a well-developed corporate strategy.
A Strategy To Develop And Deliver
Sono-Tek’s recipe for success reads relatively simple. First, provide customers with unique application expertise and knowledge. Second, continually develop in-house applications to drive sales and marketing team knowledge. Third, create a highly technical, established long-term global distribution network that can make, fill, and profit from industry demand. They seem to be following that course.
Most recently, the company showcased its comprehensive strength with the introduction of its newest robotic coating platform, a system that combines 6-axis robotic capabilities with ultrasonic dispensing expertise. The first order for the device, valued at $1.6 million, shipped in February of this year and represents the largest single order in its almost 40-year history. Other highly customized, multi-axis coating systems are expected to bring between $100- 600K for each unit sold.
Those deliverables may undoubtedly be the result of the company’s commitment to innovation. Since 1975, Sono-Tek has built a strong global brand and reputation based on its high-quality products and overall reliability. It’s application engineers, too, add to the success by providing highly specialized capabilities and the proprietary know-how of manufacturing and engineering design processes.
Moreover, the company is driving innovation from eight laboratory testing facilities worldwide that can each demonstrate and assist in applying its coating systems for current and new customers. These facilities are located in the United States, Germany, China, and Korea, Taiwan and additional locations, and allows the company to offer specialized service to its customer base.
Setting Up For A Breakout
Now, with the company posting record net income, the best strategy for sustained growth is likely to come from what they have always done best – introduce new products into new markets, and then find sub-markets in each of those segments. Next, work to maintain its strong brand reputation and to remain focused on its application expertise is also a priority. And, finally, continue to broaden its product line and expand its addressable market. Combined, those initiatives contribute to an almost certain outcome… building healthy margins, staying profitable, and maintaining financial strength.
The results of its fiscal year demonstrate that Sono-Tek is on the right track. And, as a new class of investor evaluates the Sono-Tek proposition, several truths emerge. The company is accelerating growth strategies, is strengthening its customer base, and is extending its product line to include higher value machinery that brings higher gross margins. At the end of the business day, net income always matters.
Sono-Tek, even during a period of historic disruption from the COVID-19 pandemic, is offering encouraging guidance. They noted a robust pipeline of opportunities,, and combined with their record year-end backlog of $3.5 million in place, they can achieve a revenue increase of approximately 21% for the first quarter of the new fiscal year, which ends May 31, 2020.
Thus, keeping a gauge on Sono-Tek may be wise. After all, history would suggest that the team at Sono-Tek is already working hard to offset any potential earnings impact by bringing to market innovative new products and applications that will help themselves and assist multi-industry partners in emerging from this global health crisis as well. And when business normalizes later in 2020, expect Sono-Tek to capitalize on its strengths.
Hence, the pillars of success make a difference, and Sono-Tek has them – a strong balance sheet, the ability to innovate and direct markets, and having global demand for its products. With cash and equity strong and rising, while debt very small and declining, the company may be in its best position to continue its breakout year performance. Adding its “net income” factor to the mix, that result is likely.
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