The Razor's Edge

2-Year Price History

A Word Of Caution

Stocks trading for less than $1 are loosely termed "penny" stocks. Electronic Systems Technology, Inc. (ELST) is selling for less than $1 per share. While, we stand by our ratings methodology for long term value investors, often times "penny" stocks will be more volatile. Because many "penny" stocks are lightly traded their stock price can fluctuate because of a single large trade. Also, there is generally less analyst coverage of such "penny" stocks and thus less information from which to base our rating.

Therefore, (and as always), check additional sources and available information regarding Electronic Systems Technol before making an investment decision.

Ockham's Rating

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ELST Revenue

As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company's stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 9 years. For, ELST the high and low end of the Price to Sales per share ratios are 2.41x and 1.11x respectively.

Notice that ELST's current Price to Sales per share ratio is 0.57x, which is quite a bit below what we consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $0.29, ELST is 68% below where we would expect to see it. This will beneficially factor into our final analysis of ELST as it is not often that this stock sinks to these levels.

ELST Cash Earnings

As the old saying goes, "Cash is King!" However, we prefer to capture a few other items within our analysis to identify "cash earnings". Nevertheless, an analysis of Cash Earnings is absolutely pivotal to assessing a company's value, and currently ELST is significantly below its historical average multiple of Cash Earnings. Looking at the last 9 years we can get a good understanding of what investors have grown to expect from ELST. For example, ELST's Cash Earnings ratio per share has fluctuated between 15.60 and 30.20 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where ELST is with respect to prior business periods.

So with ELST's current price (latest close of $0.29) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, ELST is 37% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with ELST.

ELST Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company. Because ELST is not currently paying a dividend we give them a neutral rating on the dividend portion of our analysis; however, be advised that because the company has a history of paying a dividend that means that the dividend has been discontinued. We are always cautious of a company that has discontinued paying a dividend as it generally suggests a financial weakness.