A Stock with Magnetism

07/14/2010 11:32 am EST

Focus: GLOBAL

Ryan Irvine

President, KeyStocks.com

Canada’s Neo makes the magnetic powders essential for today’s high-tech wares, writes Ryan Irvine in KeyStone’s Small-Cap Stock Report.

Neo Material Technologies (Toronto: NEM, OTC: NEMFF.PK) is a producer, processor, and developer of neodymium-iron-boron magnetic powders (Neo Powders), rare earths, and zirconium-based engineered materials, and minor metals including gallium and indium.

The company’s products [are] essential in many of today’s high technology applications, [including] bonded magnets for micro motors, precision motors, sensors, and other applications requiring high levels of magnetic strength, flexibility, small size, and reduced weight, [such as] computers, television display panels, optical lenses, mobile phones, and electronic chips. NEM has approximately 1,350 employees in 19 locations across ten countries.

NEM’s Magnequench division is the leading producer of Neo Powders used in the production of high- performance, bonded neo (rare earth) permanent magnets and has an estimated global market share in excess of 80%.

Through manufacturing process and composition patents which expire between now and 2014, the company is effectively the only legal supplier of Neo Powders for bonded neo magnets manufactured and sold in the United States. The company’s patent and license position is such that all end-use products containing bonded neo magnets sold in the United States must use the NEM’s Neo Powders.

The largest end-market applications for Neo powders are spindle motors used in hard disk drives in computers and non-traditional applications (such as MP3 players and personal video recorders) and in computer optical disk drives. Bonded Neo magnets are also widely used in other consumer electronic products, such as mobile phones and personal data assistants (PDAs), office automation products, various automotive motors, and sensors. The trends toward miniaturization and energy savings continue to be the primary factors expected to lead to increased substitution of bonded Neo magnets for ferrite magnets.

On May 13th, NEM reported that its revenues for the [quarter] ended March 31st increased by 126% to $65.1 million, driven by demand for the company’s specialty materials, particularly evident in the growth of the base business and new applications supplied by the Magnequench division.

The company also reported net income of C$12.8 million, or C$0.11 per share, and operating income [before interest, taxes,] depreciation, and amortization (EBITDA) of C$19.0 million. Raw material costs increased significantly by the end of the first quarter to reach 2008 peak levels; however, a product price increase in the last month of the quarter should reduce its impact on margins in the second quarter.

With a trailing price/earnings ratio of 12.87x (forward looking is under 10) and C$67.1 million or over C$0.55 per share in cash, NEM looks attractive in its current range. A double dip (recession) is a risk for a cyclical business such as NEM, but the company is positioned well long term to feed a number of growth industries [and] holds an excellent balance sheet.

(The stock closed at $3.62 Tuesday. NEM is a small-cap stock, with a market capitalization under $500 million, and so may be more risky for investors—Editor.)

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