Friday, March 30, 2012

Earnings Power in High Tech Filters

Management of LiqTech International, Inc. (LIQT:  OTC/QX) makes a persuasive argument for increasing profits as the company expands sales in new markets.  LiqTech produces ceramic silicon carbide (SiC) filters that can be used in a range of applications such as diesel vehicle exhaust filters or waste water clean-up.  Historically diesel particulate filters represented about 80% of LiqTech’s business, but that is likely to change in 2012 as waste water filter sales and services become a larger part of the sales mix. 

The company’s diesel particulate filters (DSP) are the only ceramic SiC filters available for the retrofit market, putting LiqTech in a strong competitive position in the market.  LiqTech’s SiC filters can handle higher soot loads than other filters, which makes them ideal for situations in which engines do not reach high enough temperatures to burn off soot created in diesel engines. This advantage has allowed LiqTech the chance to capture as much as 70% of the U.S. retrofit filter market.

Perhaps the more exciting opportunity for LiqTech is in the filtration of “produced water.”  This is a polite term for water that has been fouled by off-shore oil drilling operations.  LiqTech has landed a service contract with a major oil and gas company for produced-water filtration on one of its offshore platforms.  The deal will contribute to revenue beginning in the second quarter 2012.  Increasing government regulatory attention to waste water churned out by the oil and gas industry is likely to expand the market for LiqTech’s opportunity.

LiqTech plans to move aggressively to capitalize on opportunity in its markets.  It is newly fortified with cash resources from a public offering of common stock at $3.25 per share that netted $7.4 million. New sales offices around the world should extend the Company’s market reach to new markets.  Over the last six months the Company has opened sales offices in France, Germany and Singapore. 

The Company’s management also makes it clear that new product development is a priority in its budget.  LiqTech has a portfolio of patents that demonstrate its engineers are not slouches when it comes to technology.  The Company co-owns one U.S. patent and wholly owns three foreign patents.  Its claims are both composition and method patents related to the membrane and how to add the membrane to the filter.  Handling silicon carbide requires considerable skill and knowledge and thus represents a high hurdle for would-be competitors.  However, the patents appear to be a formidable moat around LiqTech’s product line. 

Sales totaled $21.2 million in 2011, providing $1.0 million in net income.  A net profit margin of 4.7% is in line with industrial applications, but might not be all the LiqTech can deliver.  Thus the present 90-plus price earnings multiple is likely to be reduced in time.

Still a young company with limited operating history behind it, a position in LiqTech would be speculative.  Perhaps the shares are best for investors with the time and patience to allow the Company to execute on its long-term business strategy.       

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. LIQT is included in the Emissions Group in Crystal Equity Research’s The Mothers of Invention Index.

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