THE ODDBALL STOCKS NEWSLETTER

11

Kopp Glass
Ticker: KOGL

Last Trade: $52.70

Sometimes investments are found through the strangest of coincidences, I found Kopp
Glass in such a way. I was looking through a list of unlisted companies and the name
Kopp Glass caught my eye because a friends ex-wife had worked in their sales department
years ago. I was intrigued that a local company was appearing in my list and decided to
research further. I purchased a few shares as a tracker position and reached out to the
company for an annual report.
When I received the annual report I was confronted with a good company with a storied
past that had a terrible pension overhang. As Ive received their annual reports over the
years Ive watched as the companys pension woes have dissipated all while their
operating earnings have remained consistent. This past years annual report had the best
news, their pension problems had resolved themselves and the companys operations were
still on track. Since the company is local I decided to attend the the most recent annual
meeting, which proved to be a great source of information.
Kopp Glass is located in Swissvale, an old industrial suburb near Pittsburgh. The company
was founded in 1926 and is still located in their original building. Kopp Glass designs and
manufactures technical glass. Technical glass is a type of glass with special features thats
designed and built for very specific applications. Some applications include glass for
railroad signals, traffic lights, and aircraft applications.
The aviation industry is a perfect example of what Kopps technical glass is designed for.
In the U.S. the FAA mandates that airports light their runways with very specific light
colors. Building a lens for a runway isnt as simple as dying glass and placing it over a
light bulb. Different types of bulbs give out different color combinations and the lens
maker needs to adjust the coloring of the lens so the combination of the lens color and
bulb color will be FAA approved. If this process seems time consuming and not scalable
thats because it is. The majority of the companys orders are small batches, 100 lenses or
less. Sometimes the company will fulfill orders of 10 items or less. Even small batches of
10 lenses are profitable for the company.
One example of a small order is the companys manufacturing of replica lantern glass and
railroad crossing lenses for railroad enthusiasts. There are not a lot of railroad enthusiasts
who want replica lenses, but there are enough that the company can support a viable
product line. I was told at the annual meeting that railroad enthusiasts are a very
consistent source of a small amount of profitable business.
Designing and creating technical glass is not a process that can be automated, especially
given the small batch sizes. Kopp Glass hand blows all of their products. Their expertise
resides in their workers. In talking with their COO he stated that for a new hire to progress
to a skilled glass blower usually takes close to 15 years. He said a few exceptional
employees have done it in five years, but most are closer to 15 years.

Copyright Red River Research Inc. 2014

THE ODDBALL STOCKS NEWSLETTER 12

The small manufacturing sizes, the long training period, and the industrial expertise have
all worked in Kopps favor and enable the company to have what some investors would
consider a moat. A moat is a durable competitive advantage that enables a company to
earn above average returns on capital. This is certainly true for Kopp whose returns on
equity have been in the 15-30% range, and if one excludes their excess cash returns jump
to 22-64%.
Although the company has had a long history of dominating their niche they havent
always been able to earn above average returns on equity. The company came very close
to bankruptcy after the 9/11 attacks when the aircraft industry experienced a significant
downturn. Orders for runway glass slowed significantly and the company reported losses.
At the time Kopp Glass was also highly indebted and came close to declaring bankruptcy.
The Board fired the CEO and brought in the current CEO, Grant Wirth, who had an
ambitious plan for recovery.
Since 2001 Kopp Glass has paid off their bank debt and grown their sales under Wirth.
Theyve cut back on unnecessary expenses and modernized their plant for more efficient
operation. The results of these efforts are seen in their financials below.
2013
15,905,511
9,878,328
6,027,183
37.89%

2012
15,218,358
9,528,547
5,689,811
37.39%

2011
15,707,597
9,623,867
6,083,730
38.73%

2010
15,129,037
9,593,090
5,535,947
36.59%

Expenses
Operating Income

3,365,604
2,661,579

3,520,162
2,169,649

3,098,829
3,047,437

2,748,092
2,787,855

Net Income
Net Margin

1,821,443
11.45%

1,502,337
9.87%

2,088,727
13.30%

1,640,503
10.84%

5.47
333,204
2.85

4.54
330,704
3.21

6.32
330,704
2.53

4.95
331,704
1.80

1,339,753
419,953
949,631

1,750,597
538,753
1,061,453
5,275

2,341,109
518,747
835,264
20,280

1,006,906
681,928
597,067

3,947,167
11,925,169
35.79

3,976,998
8,129,668
24.58

3,803,052
7,063,300
21.36

2,868,642
9,372,187
28.25

15.27%
22.83%

18.48%
36.18%

29.57%
64.07%

17.50%
25.22%

Revenue
Cost of Sales
Gross Profit
Gross Margin

EPS
Shares outstanding
Dividend per share
Cash from Operations
Capex
Dividends Paid
Stock Buybacks
Cash
Equity
BVPS
ROE
ROE ex-cash

Copyright Red River Research Inc. 2014

THE ODDBALL STOCKS NEWSLETTER 13

With returns on equity as high as Kopp has been able to achieve its reasonable to ask why
arent there more competitors? The largest reason they dont face much competition is
because of the specialized nature of their business. As noted above it can take up to 15
years for a new employee to become skilled enough at glass blowing before they can make
most of the technical pieces.
The company does have one competitor of note. Interestingly, the son of the former Kopp
Glass CEO runs the competitor. The son worked at Kopp for years, but didnt quite fit in
with the company culture. He wanted to run things his own way and decided hed take
what he learned and start a competitor. Otherwise the companys other competition is
companies making complete lighting fixtures out of cheaper plastic in China. For years
Kopp dominated the traffic light and railroad crossing market. Cheap plastic lights from
China have replaced this dominance.
The company is very closely held, many of the shares are held by management and
relatives of the founding family. I talked with the granddaughter of the founder at the
annual meeting and she said her siblings, children and grandchildren all own shares. The
founders granddaughter wasnt even aware that shares were tradable; when I told her that
they could be purchased at Fidelity her eyes lit up. I asked if she was interested in selling,
instead she said shed love to buy more.
Valuing Kopp Glass isnt a straightforward exercise. While the company does have a moat
and can earn above average returns in their niche they are unable to scale or grow at
above average rates, or really much at all. As a result the company doesnt deserve a high
earnings multiple. They currently trade for 9.63x earnings, and have traded as low as 5x
earnings in the recent past. Adjusted for their large cash holdings they trade at 5.16x
EV/EBIT.
Kopp Glass at 9.63x earnings and trading above book value initially might not seem like a
great value investment. With some investments the value hits you in the face, with Kopp
its much more subtle. Until this past year the company has struggled off and on with
legacy pension costs. The company shut the pension down to new employees years ago,
but their pension deficit was suffocating the company. Kopp has made significant
contributions to the pension since 2009, and the market has helped erase the deficit
entirely. The pensions future obligation is $20.85m, and its currently funded to the tune
of $21.2m.
The company contributed $1.2m to the pension in 2013, $900k in 2012, $700k in 2011,
$800k in 2010, $750k in 2009, and $536k in 2008. The pension has soaked up a lot of
the companys excess cash, cash that could be used to grow, or be returned to
shareholders.
At the companys annual meeting I asked what the company expected to contribute in
2014 to their pension plan, they confirmed that they didnt expect to contribute anything.
They said they had some minor capex plans for the excess cash, but no plans otherwise.
The management at Kopp has always liked carrying a larger cash balance, but they have
also been very mindful of paying out some amount of excess cash as dividends.
Copyright Red River Research Inc. 2014

THE ODDBALL STOCKS NEWSLETTER 14

The company paid out $2.85 per share as a dividend in 2013, which was a roughly 7%
yield on last years average price. Since the beginning of the year the company has paid
out the dividend at a higher rate of $.95 per quarter, which if continued will be $3.80 per
share for the year. At the current price thats still a 7% yield.
The company trades above stated book value, which is most likely understated considering
much of what the company uses to produce glass, including their facilities have been
depreciated to zero. The facility is located directly on a rail line, which could be valuable,
and they have some specialized equipment that could be valuable as well. Ultimately I
dont believe the stock priced is tied to book value in any way in this case, regardless of
how valuable, or worthless their assets might be.
The value of Kopp resides in their expertise and their client list. They are one of the few
companies, and in some instances the only company that manufactures certain types of
quality glass lenses. In some cases there are no replacements for their products.
Kopp Glass flaw is their inability to expand beyond their niche. While they are able to
earn attractive returns on their capital base, they struggle to grow sales. The company has
ample excess plant capacity, but the market for their glass products is limited.
Putting an exact value on Kopp Glass is difficult. What I do know is the current value is
too cheap. In Intelligent Investor Benjamin Graham talks about how its possible to
know a mans overweight without knowing his exact weight. He uses this analogy with
companies to say that its possible to know that a company is cheap without knowing their
exact fair value. This analogy certainly applies to Kopp Glass. The company is paying a
7% dividend and is able to earn 15-30% returns on equity. At 5x EV/EBIT Id say this is too
cheap. Maybe 7x EV/EBIT is reasonable, or 15x earnings, an exact value is unknown, but
at current prices the shares appear very cheap.

Copyright Red River Research Inc. 2014

THE ODDBALL STOCKS NEWSLETTER 25

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About The Author

Nate Tobik is the writer and researcher of the Oddball Stocks Newsletter. Nate lives
with his wife and two sons in Pittsburgh, Pennsylvania. He enjoys hunting for unusual
stocks in the dark corners of the market. In addition to writing this newsletter and a free
blog at http://www.oddballstocks.com, he runs http://www.completebankdata.com,
which is a tool that helps investors find and research bank investments quickly and
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When not researching stocks and spending time with his family Nate enjoys spending
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Copyright Red River Research Inc. 2014