Summary
The L.S. Starrett Company has generally fared well in recent years, but it did experience some pain during the early days of the COVID-19 pandemic.
Performance this year is looking particularly appealing, which adds to the company’s value proposition.
Shares look cheap, but investors should be prepared for the kind of volatility that comes with a firm like this.
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Hispanolistic/E+ via Getty Images One interesting avenue for investors to explore when looking for attractive investment opportunities is to buy into smaller companies. No doubt, smaller firms tend to be subjected to far greater risk than their larger counterparts. Having said that, they are often overlooked by the market and can trade at significant discounts relative to what you would anticipate. So finding the right one can lead to significant upside for long-term investors. One interesting prospect that comes to mind is a company called The L.S. Starrett Company ( SCX ). With its roots dating back to 1880, the enterprise is one of the oldest in the nation. However, it has remained, for a long time, a rather small enterprise. The company was hit some by the COVID-19 pandemic, but financial performance since then has been looking generally positive. What’s more, shares of the business are trading at levels that could indicate attractive upside for investors who buy in now. A play on tools
The L.S. Starrett Company operates as a provider of measuring and cutting products across the globe. Its product lines include precision tools, electronic gauges, gauge blocks, optical, vision, and laser measuring equipment, custom engineered granite solutions, tape measures, and more. Although the company does specialize in old school tools, it also focuses on more high-end technologies as well. One of the best examples is the company’s recently-released DataSure 4.0 Wireless Collecting System. This system collects and transmits measure data that is used for production and quality control for customers. In essence, it is a tie-in to the IoT (Internet of Things) revolution.
For the most part, it sells these products throughout North America. However, it also has operations in at least 100 other countries. In all, approximately 49% of its revenue comes from outside the US. Though the company is small, with a market capitalization as of this writing of $68.51 million, it does well to innovate every year. During its latest completed fiscal year, for instance, the business introduced approximately 200 new electronic precision measuring tools in addition to its wireless data collection instruments. *Created by Author
In the years leading up to the COVID-19 pandemic, revenue growth at the company was modest but consistent. Between 2017 and 2019, for instance, the company grew its sales from $207.02 million to $228.02 million. Then, in 2020, revenue declined to $201.45 million. But that drop was short-lived. For its 2021 fiscal year, management reported revenue of $219.64 million. Although this does not represent a complete turnaround from the decline and experienced in 2020, it does mark significant progress. Fortunately for investors, growth on the top line has continued into the current fiscal year. According to the firm, in the first quarter of its 2022 fiscal year, the company generated revenue of $61.51 million. That represents an increase of 24.5% over the $49.41 million generated the same time last year.
On its bottom line, things have been much more volatile. But that shouldn’t be much of a surprise. Smaller companies, especially those as small as this one, are likely to experience volatility from year to year. As an example, we need only look at the past five years. In 2017, the company generated net profits of just under $1 million. It then lost $3.63 million in 2018 before turning a profit of $6.08 million a year later. 2020 then saw a significant loss in the amount of $21.84 million but this was followed up by a profit in 2021 of $15.53 million. Similar volatility can be seen when looking at other metrics of profitability as well. Operating cash flow is the greatest example. However, if you adjust changes in working capital, the trend that it experienced, ignoring the decline seen in 2020, is really clear. On an adjusted basis, operating cash flow in 2021 totaled $15.98 million. And finally, we have EBITDA. Just like with operating cash flow, this metric experienced a downturn in 2020. But 2021 marked a high year for the […]
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