Note, the missing net income figures on this chart were losses, which will not plot on a logarithmic scale.
| CLEMEX (CXG.A., Canadian) | |
| RESEARCH SUMMARY | |
| Report Author(s): | InvestorsFriend Inc. Analyst(s) |
| Author(s)' disclosure of share ownership: | The Author(s) hold shares |
| Based on financials from: | April 2006 Y.E. + Q1 '06 |
| Last updated: | 15-Sep-06 |
| Share Price At Date of Last Update: | $0.22 |
| Currency: | $ Canadian |
| Current Rating (Company Rating does not consider the circumstances of any individual investor and is therefore not a recommendation and is not Investment Advice): | (highly) Speculative Buy rated at $0.22 |
| DESCRIPTION OF BUSINESS: Clemex develops, manufactures and markets image analysis systems and software used by quality control and research microscopy laboratories. ... Its customers span the globe and consist of large manufacturing and pharmaceutical concerns as well as prestigious universities. Has only 27 employees who work out of the 13,000 square foot head office near Montreal. We believe that sales are handled by sales agents on a commission basis rather than by field sales employees. 22% of sales are in Canada, 40% to the U.S and 38% outside of North America. | |
| RATING: The graph indicates that this has been quite a poor performer over the years. Be aware that this company is very small and the stock has relatively poor trading liquidity with larger bid/ask spreads. The fundamental valuation is reasonable based on profits in the last four quarters. The company has come through a very difficult period of several years of losses and sharply declining sales. Through cost cutting the company has now managed to become reasonably profitable. And, this is a high tech company that is possibly a world leader in its small niche. Management is forecasting recent profits to continue and grow. The risk is that profits evaporate again. Insider trading appears to give a moderately positive signal at prices under about 28 cents. This stock is speculative but has potential. We rate this stock as a (highly) Speculative Buy. Be prepared for volatility. This is probably a stock to be quite patient in buying by entering buy orders below the recent market price at any time. This tiny company is only rated on this Site because it was on the Site previously. In general it is not a stock we would normally look at. | |
| RISKS: Small company dependent on key staff. Competitors could develop better technology. Future earnings will depend partly on the ability to realize on the investment in product development costs. | |
| INSIDER TRADING / INSIDER HOLDING: Checking insider trades in the past year, five insiders sold some shares when the price ran up to about the 35 cent level. 1 insider recently bought 8000 shares at 28 cents. Some insiders have exercised options and held the shares. The founder and CEO holds 4.9 million shares, which is a positive indicator. Several other insiders own 100,000 to 300,000 shares. Overall the sales at 35 cents are indicative that insiders were not confident the price would stay at that level, but the lack of sales under 30 cents, combined with the strong insider ownership is a moderately positive signal at a share price of 22 cents. | |
| WARREN BUFFETT's TENETS: Warren Buffett would not buy this still early stage company. (see Robert Hagstrom's book) - not extremely simple to understand but not excessively complex (marginal pass), poor profit history (fail), does have favourable prospects (pass), seems to have rational ethical management (pass), high ROE although this was because prior losses reduced the equity so much (pass) , high profits on sales recently (pass), and reasonably low debt ratio (marginal pass) and probably selling at a substantial discount to intrinsic value (marginal pass). | |
| RECENT EARNINGS AND SALES TREND: After several years of losses, the company has enjoyed positive and reasonable profitability for the past 7 quarters. However, it is disturbing that sales and profits declined in the last two quarters. | |
| VALUE AND GROWTH RATIOS: Recent price $0.22. Trading at 4.6 times book value which is nominally unattractive but is not a factor that we place much weight on in this case, sales per share has been erratic with several negative growth years although it grew in 2006 Interim P/E is attractive at 12 Interim R.O.E. is very high but essentially meaningless due to the low equity level. Earnings per share have been erratic and often negative although the last 7 quarters were positive. 2006 saw good earnings growth but Q4 2006 and Q1 2007 saw declines. The total market value is tiny at $4.6 million. These ratios indicate a Speculative (lower) Buy rating. | |
| SUPPORTING RESEARCH AND ANALYSIS | |
| Symbol and Exchange: | CXG.A, Canadian Venture |
| Currency: | Canadian $ |
| Category: | Growth |
| Contact: | clemf@clemex.com |
| Web-site: | www.clemex.com |
| INCOME AND PRICE / EARNINGS RATIO ANALYSIS | |
| Latest four quarters annual sales $ millions: | $5.9 |
| Latest four quarters annual earnings $ millions: | $0.4 |
| P/E ratio based on latest four quarters earnings: | 11.8 |
| Latest four quarters annual earnings, adjusted, $ millions: | $0.4 |
| BASIS OR SOURCE OF ADJUSTED EARNINGS: No adjustments are made to earnings. | |
| Quality of Earnings Measurement and Persistence: Reliable, most expenses are cash expenses and the depreciation expense although estimated is not that large. Recently, free cash flow has exceeded profit as the company has not invested much in fixed assets. | |
| P/E ratio based on latest four quarters earnings, adjusted | 11.8 |
| Latest fiscal year annual earnings: | $0.6 |
| P/E ratio based on latest fiscal year earnings: | 7.9 |
| Fiscal earnings adjusted: | $0.6 |
| P/E ratio for fiscal earnings adjusted: | 7.9 |
| Latest four quarters profit as percent of sales | 6.5% |
| Dividend Yield: | 0.0% |
| Price / Sales Ratio | 0.77 |
| BALANCE SHEET ITEMS | |
| Price to (diluted) book value ratio: | 4.63 |
| Quality of Net Assets and Book Value Measurement: Good quality, no material intangible assets. Development costs of new products are expensed in accordance with industry practice (previously were capitalized). To a certain extent the R and D costs are subsidized by tax credits and grants. Expensed Development costs plus the value of the credits and grants can be considered to create a "hidden" asset of the company. However, the shares trade well above book value. | |
| Number of Diluted common shares in millions: | 21.0 |
| Controlling Shareholder: President, Clement Forget holds 27% | |
| Market Capitalization $ millions: | $4.6 |
| Percentage of assets supported by common equity: (remainder is debt or other liabilities) | 39% |
| Interest-bearing debt as a percentage of common equity | 63% |
| Current assets / current liabilities: | 1.9 |
| Liquidity and capital structure: Fair liquidity at this time, has improved due to recent profitability. | |
| RETURN ON EQUITY AND ON MARKET VALUE | |
| Latest four quarters adjusted (if applicable) net income return on ending equity: | 38.6% |
| Latest fiscal year adjusted (if applicable) net income return on average equity: | 79.3% |
| Adjusted (if applicable) latest four quarters return on market capitalization: | 8.3% |
| GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE | |
| 5 years compounded growth in sales/shr | -1.9% |
| Volatility of sales growth per share: | Volatile with periods of decline |
| 5 years compounded growth in earnings/shr | negative past earnings |
| 5 years compounded growth in adjusted earnings per share | n.a. |
| Volatility of earnings growth: | Highly volatile with periods of losses |
| Projected current year earnings $millions: | not available |
| Projected price to earnings ratio: | not available |
| Over the last five years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share? | No |
| Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: | 79.3% |
| More conservative estimate of compounded growth in earnings per share over the forecast period: | 7.0% |
| More optimistic estimate of compounded growth in earnings per share over the forecast period: | 10.0% |
| OUTLOOK FOR BUSINESS: The company appears to have cut costs to the point where the existing profit is sustainable. Given the volatile history of past sales the outlook for growth is quite uncertain. However the company indicates that it is fully confident of meeting its net income and sales targets for this fiscal year. We believe that it has good technology but that the market is small. We note that it has recently strengthened its Board and this seems positive. Management appeared to signal that the current quarter would not be too strong and it would be Q3 before stronger results materialise. | |
| Estimated present value per share: Assuming that earnings will remain positive and grow moderately, we calculate a value of 20 cents if earnings grow at 7% for five years and the P/E rises slightly to 12, or 29 cents if the earnings grow at 10% for five years and the P/E rises to 15. | |
| ADDITIONAL COMMENTS | |
| INDUSTRY ATTRACTIVENESS: (These comments reflect the industry rather than any particular company.) I have not studied the industry but my impression is that this is a high tech industry that has strong growth. I am concerned that industry does not seem to generate repeat sales, this may a one (or very few) sale per customer industry. There is some ability to sell upgrades to existing customers. Overall, I am unsure of the attractiveness of the industry. | |
| COMPETITIVE ADVANTAGE: For years the company has claimed that its technology is superior but it is disappointing that they were not better able to capitalize. I am not aware of how the company is positioned compared to competitors. | |
| RECENT EVENTS: Sales to the Pharmaceutical industry have been strong and account for 25% of sales. | |
| ACCOUNTING AND DISCLOSURE ISSUES: The disclosure is pretty skimpy but nevertheless is reasonable for the size of the company. | |
| COMMON SHARE STRUCTURE USED: Normal common shares, 1 vote per share. | |
| MANAGEMENT QUALITY: Management are the principal owners and are technically very knowledgeable and experienced. It appears that management made mistakes that led to several years of losses and near insolvency. More recently profitability has resumed. In the past management has lots of excuses for poor results including currency movements and difficulties that its customers were experiencing. We question whether shareholders would have been better off if the company had been sold or made more strategic partnerships. The CEO appears to be a survivor and good at cost cutting since the company has managed to whether a period of losses and declining sales. | |
| EXECUTIVE COMPENSATION: To date, reported executive compensation has been reasonable. | |
| BOARD OF DIRECTORS: 7 members. This appears to be a well qualified Board, particularly for this small company. Only the CEO owns a truly substantial amount of shares (4.9 million). Three other Board members hold significant shares (100 to 300 thousand shares) | |
| Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, earnings growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the companies growth prospects. Despite this diligence my analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry. | |
| DISCLAIMER: All stock ratings presented are "generic" in nature and do not take into account the unique circumstances and risk tolerance of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. InvestorsFriend Inc. itself does not have a position in any of the indicated securities while the authors may have a position. | |
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