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I have been following this fascinating small-cap company for some time, and have acquired a reasonable position in the stock over the past few months. A little background: Industry OML is a high-tech engineering company which specializes in making precision micro-components for the automotive, defense and sports / recreation industries. OML has developed a patented process using very specialized, computer-controlled cold forging equipment to build very precise components from a variety of lightweight materials. These components are currently used in automotive airbags, transmissions, ammunition belts, and track shoe spikes. OML is able to quickly and efficiently fabricate a multitude of micro-components using their computerized equipment. OML first gained notoriety for their patented "Christmas tree" track spike. This spike is made out of ultra-lite ceramic and is lighter than traditional metal spikes. In addition, the patented shape compresses rather than tears the track surface, releasing energy back to the runner. OML's track spike was worn by 22 GOLD medal winner's at the 1996 Olympics in Atlanta (including Michael Johnson, but unfortunately not Donovan Bailey). OML has long term contracts with Nike, Adidas, Reebok and Footlocker for track spikes. OML is now expanding their expertise with contracts in the automotive and defense industries. OML has established an excellent reputation as a high quality supplier, and is in the enviable position of having customers approach them with new contracts as opposed to having to aggressively solicit new work. OML's customer list is an impressive array of multi-national companies include NIKE, Adidas, Reebok, Textron, the US military, Chrysler, Volkswagen and Mercedes Benz. Financial The financial statements really highlight the enormous potential of this company (Q1 and Q2 for current year available on SEDAR). Gross margins are around 80%, and net profit margins (after tax) are around 50%. I have talked with management, and they believe these margins are sustainable. For the first two quarters of the current year, OML has generated earnings per share of $0.06 (Cdn). A June 1998 analyst report by Brink Hudson Lever forecasts earnings of $0.20 for the current year. I believe this to be conservative based on the fact that the forecast assumes virtually no new contracts over the US $2.2 million in hand at the time of the report (they have since signed additional contracts with the US military and Nike). In addition, OML has over doubled the number of cold forging machines in operation from 2 in Q1 to 5 currently, and they have plans to add another 5 machines over the next six months to keep up with demand. Brink forecasts 60% growth in revenue and earnings over the next few years. Strengths: - the margins on this company are outstanding - there is very limited overhead costs (only 5 personnel currently) due to high degree of mechanization - future revenues are secured in many cases through long term contracts (3-5 years) - the company is currently ordering new machines as fast as they can to keep up with demand - all the company's revenues and costs are in US dollars, a plus if the Cdn dollar keeps sliding - barriers to entry are high since the company has used patents to protect their processes - the company is able to produce components to precise tolerances out of lightweight products in many cases cheaper than traditional components, yet still maintain their high margins - the company has an excellent reputation for high quality with their suppliers Weaknesses - high reliance on key personnel - over 82% of shares held by original investors (over 60% by insiders) make liquidity somewhat of a problem. This lack of liquidity has contributed to some of the price swings we have seen over the past several months I personally believe OML is one of the best small cap companies in Canada, and a real sleeper on the ASE. Please do your DD and post any questions you may have. The company has a web-site, but it is not kept up to date. The IR contact for the company is Barry Lee. He can be reached at (403) 571-7200. | ||||||||||||||
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