Technology Research Corporation : A Quality Micro Cap for Value and Growth Investors

Technology Research Corporation (TRCI) is an internationally recognized leader in electrical safety products that prevent electrocution and electrical fires, and protect against serious injury from electrical shock. The company also supplies power monitors and control equipment to the United States military and its prime contractors. Founded in 1981 and based in Clearwater, Florida, TRCI has built a solid reputation as leader in the design and manufacture of a broad array of ground fault circuit interrupters for the home and the workplace. The increasing utilization of these devices in electrical equipment is responsible for much of the continuing decline in electrocution deaths in the US in recent decades. Since their introduction, ground fault circuit interrupters have saved thousands of lives by continuously sensing the flow of electricity through a circuit and interrupting that flow in milliseconds when a leakage of current is detected. When that leakage is due to electricity passing through a person, the interrupter works so quickly that serious injury is avoided, reducing what could have been a fatal accident to only a painful shock. The same technology prevents countless fires from short circuits, cutting the electric flow before materials in contact with the faulty circuit catch fire. Though NASDAQ listed, TRCI has a capitalization at this writing of less than $30 million and there are no Wall Street analysts following the company. As is the case for any listed company with a very small capitalization, TRCI will automatically be eliminated from most investors' stock screening programs with the intention of filtering out ¨penny shares.¨ At the same time, a company of this small a size is not an attractive target for succulent investment banking fees, providing no incentive for Wall Street analysts to follow the company. I believe that this company is a classic ¨under the radar,¨ high quality micro cap which should interest both value and growth investors, as it has a considerable potential for significant share price appreciation in the coming quarters. The following is my investment case:Firstly, the quality issue. TRCI derives nearly 40% of its approximately $34 million in annual revenue from military sales. TRCI has won the Defense Logistics Agency Gold Medal for 14 consecutive years. This award is given for 100% on time delivery with zero defects. This company of 375 employees is led by very capable and experienced managers, including the continuing active role of co-founder Raymond Wood as Senior Vice President and Director of Government Operations and Marketing. Owen Farren, the Chairman, President and CEO, has led TRCI since 2007 and has a distinguished curriculum of building shareholder value in various listed and privately-owned companies. He has been an aggressive buyer of shares over the past two years along with other insiders. In fact, there has been no inside selling of TRCI shares since February of 2007.TRCI´s wholly owned manufacturing facility in Honduras is ISO 9002 certified, and the company holds International Traffic in Arms Regulations ((ITAR)) licenses which allow for production of certain parts for the US military at the Honduras facility. Additionally, most of the company´s products are listed by Underwriters Laboratory ((UL)) and the Canadian Standards Association ((CSA)). They are approved by various safety standard bodies and meet US Government Safety regulations.Though the dramatic decline in the US housing industry has created more difficult conditions for TRCI, the company has remained profitable and debt free, and has continued to increase shareholder equity each and every year since 2005. In short, TRCI is indeed a micro capitalization share, but it is also led by serious professionals dedicated to building shareholder value through providing a lifesaving product, which must be manufactured to extremely high quality standards. It is no exaggeration to state that lives depend on the correct functioning of their ground fault circuit interrupters and other electrical safety products. The value case is easily presented. TRCI is what companies should be: a machine to generate cash. With a book value of over $4 per share and a balance sheet with no long term debt, TRCI has a large amount of cash, as is to be expected given its price to free cash flow ratio of 4. The share currently has PER of only 8, and a quarterly dividend of 2 cents per share, giving investors a dividend yield of approximately 1.8%. Gross margins are consistently high at just over 38%, and the price to sales ratio is surprisingly low at 0.75, which combined with free cash flow and other attractive valuation metrics clearly makes TRCI a potential takeover target. What about growth? A strong case can be built for TRCI as a growth share as well. The company’s military revenue stream is not only reliable but very likely to grow as the Pentagon seeks to integrate ground fault circuit interrupters into increasing numbers of tactical vehicles, naval vessels and mobile electric generation systems to better protect our soldiers and civilian workers from electrocution hazards. At the same time, Occupation Safety and Health Administration rules mandating circuit interrupters in power cords are increasing demand for TRCI´s products. Additionally, the company is very active in the pursuit of international sales as electrical safety standards improve in developing nations throughout Asia and Latin America. Further growth can be expected from TRCI´s well executed move into the power storage sector, in line with the company´s strategic decision to focus on power management and power storage solutions. On March 3rd, TRCI announced an agreement to acquire 100% of Patco Electronics of Titusville, Florida. Patco designs and manufactures battery management tools for secondary and re-chargeable batteries (both lead acid and lithium ion) in the military, both commercial and industrial sectors. This acquisition offers multiple opportunities for TRCI to leverage its sales force and offshore manufacturing base with Patco´s energy storage solutions to generate significant growth in coming quarters. Typically, TRCI´s management was an excellent steward of shareholders´ funds in this acquisition, which is expected to be accretive to TRCI´s earnings in the fiscal year ending March 31, 2011. While the share price has risen following the announcement of the Patco acquisition, I believe that the current price continues to be a very attractive entry point for new investors. TRCI is a high quality micro cap with an excellent life-saving product which has a huge untapped market in emerging countries as well as in additional applications in developed countries. From this strong base, the company is expanding into the high growth energy storage market. At the same time, the company offers investors very sound financials (including a dividend) with a first rate management team that is strongly committed to rewarding shareholders. While the small capitalization and modest dollar volume of daily trades puts this share off the buy list of many institutional investors, it should have a place in the portfolio of individual investors who are seeking an ¨under the radar¨ value and growth opportunity. Disclosure: Author is long TRCI common stockComplete Story »