The Weekly Value Finder #3

Going underwater this week to find treasure

The point of the weekly value finder isn’t to look for companies that everyone knows about, are highly regarded by the institutions, or that you find some TikTok stock trader pitching something that is about to go to the proverbial moon.

No this is a weekly article that is aimed to find true value that isn’t being noticed by the broader market.

So what are the details this week?

I want to talk about a micro-cap stock today that is currently sitting at just over 2.5x Price/Cash, is under 10 Price/Free Cash Flow, and has no long term debt. The company also is lightly held by institutions (~18%) with the majority held by insiders (~56%).

What company am I speaking about?

Coda Octopus Group, Inc. (CODA).

Below is the company description snippet taken from Finviz.com, feel free to skip/scan through it.

Coda Octopus Group, Inc., together with its subsidiaries, develops and sells underwater technologies and equipment for 3D imaging, mapping, defense, and survey applications in the Americas, Europe, Australia, Asia, the Middle East, and Africa. The company operates through two segments, Marine Engineering Business and Marine Technology Business. It sells technology solutions to the subsea and underwater markets. The company's solutions include geophysical systems, a geophysical data acquisition systems, processing, and analysis software that are used primarily by survey companies, offshore renewable companies, research institutions, and salvage companies; GNSS-aided navigation systems; Echoscope and Echoscope PIPE used for real time monitoring of cable installations for offshore wind projects; and diver augmented vision display system. It offers CodaOctopus GeoSurvey products, such as hardware and software solutions for field acquisition of sidescan sonar and sub-bottom profiler; and CodaOctopus DA4G productivity suite of software that automates the tasks of analyzing, annotating, and mosaicing complex data sets. It markets its products under the CodaOctopus brand name. Coda Octopus Group, Inc. was founded in 1994 and is headquartered in Orlando, Florida. —Taken from Finviz.com

So you just scanned through that general description, as you should, so let me lay it out simply for you. Coda makes their bread and butter through their sonar technology. This technology, that ranges in 4D, 5D, and 6D, is the only technology that can map 40 million 3D data points as well as see multiple real time targets with one sensor.

The company already supplies their equipment to some of the biggest names involved in the marine industry. These include the NYPD, US Navy, Exxon, BP, Chevron, Boskalis, NavSea, and many more.

The key to the company, in my opinion, will lie in their ability to increase sales in the defense market. The ability to measure and give feedback in real time to the departments most critically need it is something that is invaluable. Multiple groups have already shown significant interest in the technology and are currently using or trialing the technology, as shown below in Coda’s investor presentation.

One of the other technologies to be excited about going forward though, is the recently recently released DAVD 3.0 (Diver Augmented Vision Display) System. This DAVD system has been being developed since their initial 1.0 release in 2019 and provides multi-dive support with real time audio communication, real time enhanced video processing, diver positional tracking, health status, and much more.

The DAVD 2.0 system is authorized for Navy use, and the newest 3.0 development is going through the same steps that they have in the past. The largest difference in this 3.0 system is the expansion to a full face mask and “tetherless” capability. This expands the usage ability of the system.

According to multiple estimations (found here, here, here) the marine sonar industry is projected to at least double by the end of the decade. With the main players in the sonar industry such as Raytheon, Lockheed Martin, L3Harris, JRC, Edge Technologies, being massive companies that have money to burn in M&A it seems likely to me that Coda is an obvious target for acquisition.

From my projections, Coda has an estimated fair value between $4.30-5.09 a share, depending on which calculation I rely heavily on. At the current price of $4.95, Coda is sitting at right about the top of fair value.

While I do expect that the company to continue to grow its revenue, free cash flow, and EPS each year going forward as they continue to deploy the newest technology, the main driver of investor profitability will be an acquisition by one of the larger influencers in the industry.

I will most likely take a small position at some point in the near future and let it sit in on the bottom shelf of the account collecting dust until they either go bust or get acquired.

As always, thanks for reading and happy investing!