September 08, 2015 - 8:48pm EST by
2015 2016
Price: 19.00 EPS 1.90 2.0
Shares Out. (in M): 1 P/E 10.0 9.5
Market Cap (in $M): 15 P/FCF 10.0 9
Net Debt (in $M): -12 EBIT 2 2
TEV ($): 3 TEV/EBIT 1.4 1.3

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Opt-Sciences Corporation (OPST)
We have been shareholders of Opt-Sciences Corporation (OPST) for over ten years and fully
expect to remain shareholders for the next ten years! Over the period the shares have more than
tripled from approximately $6 per share to the current $19 per share. The shares were
substantially undervalued when we purchased them ten years ago and remain materially
undervalued today, despite over a 200% return over the period.
OPST is a very conservatively run Company with a focus on building long term value and not
quarterly results. As one of the Company’s Board members recently put it during one of our
recent discussions, “OPST is one of the safest companies in the market!” We strongly agree.
OPST is essentially a pile of cash, (conservatively managed, diligently protected and generated
by the consistent profitability of the business over the decade), attached to a great business with a
solid sustainable moat. The Company has no debt or long term liabilities and a current ratio of
OPST, formed in 1956, is in the business of depositing anti-glare and/or transparent conductive
optical coatings on glass used primarily to cover instrument panels in aircraft cockpits. The
Company also provides full glass cutting, grinding and painting operations which augment the
optical coating capabilities. Most of the Company’s products are designed to enable pilots to
read aircraft instruments in direct sunlight or at night or in covert operations using appropriate
night vision filters or to protect the instruments from electromagnetic interference. This is a
niche business primarily dependent on the needs of new and used aircraft for initially installed
parts, spare parts, replacements and upgrades. It requires custom manufacturing of small lots of
products to satisfy specific customer requirements. What gives the Company a solid moat is that
once the product is “designed in” a customer’s aircraft it remains there for the life of the
particular aircraft. Changing the optical coating supplier requires an extensive and expensive
recertification process that customers rarely undertake.
The Company is currently an approved vendor for major aircraft programs. OPST continues to
be a major supplier for the anti-glare face plates covering the flat panel displays on the Boeing
777 and the 737 Next Generation models of commercial aircraft and the long range Gulfstream
and Dassault Falcon business jets. The Company is also an approved vendor for instrument glass
used on several military aircraft platforms including the C5 Galaxy and the C130.
The Company enjoys a 20% to 25% market share in the US. It has four major competitors, who
are either private or divisions of large corporations. Hence, industry data is very limited. Given
the niche character and size of the market, there clearly exists an opportunity for consolidation.
OPST management is cognizant of this and is interested in possibly buying a competitor or
selling the Company. Given OPST’s cash position and future prospects, we would prefer the
purchase of a competitor.
OPST Income Statement
(Dollars in Thousands)
                          2015 (6 Mos)          2014         2013        2012
Net Sales                3,579                7,074         6,220       6,887
Cost of Sales           2,101                4,611         3,953       4,663
Gross Profit             1,478                2,463         2,266       2,024
Operating Exp.           596                1,219         1,100       1,031
Operating Income       883                1,244         1,167         923
Other Income             202                   497            318         493
Pre-Tax Income       1,084                1,741         1,485       1,486
Taxes                        423                   627            541          541
Net Income                662                1,114            943          944
EPS                          0.85                 1.44           1.22         1.22
Gross Margin            41.3%               34.8%          36.4%       30.3%
Operating EPS            0.69                 0.98           0.92         0.78
Cash/Share*            15.60                14.51          13.40       15.08
Share Price              19.00                19.00          19.00       19.00
Net Share Price         3.40                  4.49            5.60         3.92
Net Price/
Operating EPS**    2.45                 2.30            3.05         2.51
* Cash balance in fiscal 2013 is lower due to a $.65 dividend and a $0.5 milliom increase in accounts    receivable.
** Annualized for 2015.
As can be seen from the historical results, the Company has been consistently profitable, with
improving margins, consistent sales and a stable cash position. (In fiscal 2013 the Company paid
a $.65/share dividend and had a $0.5 million increase in accounts receivable.) The attractive
economics of the coating business are obscured by the large cash balance. We calculated a price
to earnings ratio excluding the cash and excluding the earnings on the cash. On this basis the
shares trade for 2.5 times operating earnings!
With the business unambiguously cheap, the issue becomes the cash balance. First, as of fiscal
year end 2014, the portfolio was conservatively invested with 29% in cash, 42% in fixed income
securities, 29% in preferred stock, and 5% in common stock. And the management has no
delusions that they are great stock pickers and want to aggressively invest their cash. Their
objective is to conserve capital. The second obvious question is, “What is the purpose of the
cash? We have argued with management that the cash is in excess of the needs of the business
and should be used to pay dividends or buy-back shares. Management did pay a dividend in
fiscal 2013, but we should not expect this to be the primary use of their cash. The Board has
adamantly and confidently argued that they need the cash to protect the business from potential
cyclicality and to take advantage of business opportunities to expand their facilities or possibly
fund the purchase of a competitor. Although we don’t completely agree, after ten years with
management we respect their opinion and are confident that the cash will not be used frivolously.
In fact, the Company is currently expanding its facilities to accommodate larger glass. The
Company is spending $1 million to $1.5 million to purchase new machinery. As they put it, their
objective is to expand their market coverage while retaining their legacy business. They always
want to have product ready when the customer needs it or at some point you will be “designed-
out” of the next aircraft.
Management and Board
On first analysis the management structure may be cause for concern, but after ten years of
observing how they run the Company, we are much more comfortable. The Arthur John Kania
Trust owns 66% of the outstanding shares and thus controls the Company. The Board has only
three members: Arthur J. Kania (83) who established the trust for the benefit of his children;
Arthur J. Kania, Jr, (59) who has no operating role in the Company: and Anderson McCabe (59),
who is the CEO and runs the Company. The concern is that the two Kania’s are father and son
and McCabe is the older Kania’s son-in-law. This raises the obvious red flags, but we have found
no evidence that the Company has been run simply to enrich management and the Board. For
example, the CEO, McCabe, receives a total annual compensation of $194,000. The two Kania’s
receive $15,000 each of annual director fees. There are no options or share awards. The only way
management and the Board prosper is if all shareholders do well. The only concern we have is
that they may be too conservative in protecting the Company’s assets and not that they are
enriching themselves, which is not a terrible problem.
We touched on valuation when we analyzed the Company’s performance, noting the OPST
currently sells for less than three times operating earnings. During the latest quarter the book to
bill ratio was 1.54 and the back-log was up 45%. The Company is now on track to earn $1.50 per
share in operating earnings in fiscal 2015, which ends in October. The Company had $15.60 per
share in cash at the end of the second quarter. Let’s discount this cash and conservatively assume
$1.60 per share is needed to run the business. This leaves $14 per share in excess cash. As for the
expected earnings, let’s give them only an extremely conservative multiple of eight times. Thus
the valuation of the Company would be $14 in cash plus eight times the $1.50 in expected
earnings or $26 per share (a 37% premium to the existing share price)! Even this would be an
extremely cheap valuation as it gives no credit for the expected growth or the earnings stability
of the Company.
1) OPST sells for less than three times after tax operating earnings.
2) The Company has a consistent record of profitability and cash generation.
3) The Company is very conservatively managed for the long term.
4) The Company is in a niche business with a solid moat.
5) OPST has $15.60 per share in cash, no long term liabilities, and a current ratio of 25.
6) The Company has expansion and consolidation opportunities.
7) The business conditions are currently very strong.
8) Management incentives are aligned with outside shareholders,
9) Its cash position is very conservatively managed.
1) Management controls the Company, holding two thirds of the shares.
2) The Board has no outside directors.
3) The shares are very illiquid and require patience to purchase.
4) A significant percentage of the valuation is in cash which could theoretically be
    squandered by management.
5)Their business is concentrated with several major contractors and manufacturers.
6) Management is not expected to pay a dividend.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


1) Honestly, we don't need a catalyst. We would be content to participate in the growth of the business.

2) Sale of the Company to a competitor.

3) Children of founder seek liquidity.

4) Company decides to buy-out outside shareholders with excess cash.

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