Maren Caruso/Photodisc via Getty Images
Maren Caruso/Photodisc via Getty Images
Retractable Technologies (NYSE:RVP) is a hidden gem trading below our assessed liquidation value of $2.25 per share. The company is well-positioned to get back into profitable territory soon. We believe that the market did not fully digest that the reported other long-term liability of $75 Million requires no repayment because this item arises from the funding RVP received from the U.S. government to expand its production facilities. In addition, the $94 Million Covid Vaccine Syringes order from the U.S Government further allows RVP to become more well-known in the international market. Purchasing a company that at least breaks even and below its liquidation value have been a fool-proof way to make monies in the stock market. Our price target of RVP's stock at around $4 per share and the 2021 insider valuation of $10 per share from the management makes the current price of RVP at $2 per share an attractive buy.
There are many reasons why RVP is a Microcap hidden gem. Retractable Technologies were the first to produce retractable syringes to eliminate the problem of needle stick injury. Its primary product, the Vanish Point Syringes, is used in vaccinations, blood collections, and intravenous therapy. The Vanish Point represents more than 90% of sales, and the patent on Vanish Point is set to expire before 2032. Retractable Technologies became more well-known because the U.S Government has chosen its Vanish Point Syringes for the COVID Vaccine campaign. In addition, the company received about $81 Million in free taxpayer monies to expand its factory. This $81 Million is being reported as a liability while the company has no repayment obligations. This fact is stated on pages 11 and page 14 of 2022 10Q3. A screenshot is provided below for your convenience. We believe the market does not understand this item completely, so the current Market Cap of RVP is only $67 Million.
81 Million Funding (SEC) Funding Reported As Other Long-Term Liability (SEC)
There are a few catalysts in place to speed up the share price of RVP in reaching our price target. First, as shown on 2022 10Q3, the $81 Million funding from the government is being reported as other Long Term Liabilities on the balance sheet, and its amortization is being reported as other Income-TIA on the income statement. We believe more investors will buy RVP once they realize that this Long Term Liability requires no repayment except the 21% tax on the amortization amount. In addition, RVP becomes a company trading below its liquidation value after we disregard this $81 Million as a liability. Finally, the company is expected to attract more international sales because of the free advertisement it received by being the chosen syringes producer for the U.S Government.
The prospects of Retractable Technologies are much better after COVID. The company was always a negative earning company before COVID, with an annual Revenue of about $30 Million from 2012 to 2018, an annual gross profit of about $10 Million, and the company spent most of the gross profit on General Admin and Selling with little success on growing its Revenue. In addition, the founder and CEO, Thomas J. Shaw, also received a 5% royalty on total Sales. This 5% royalty continues indefinitely on all sales. As a result, the company lost a total of $14.5 Million from 2012 to 2018. However, the recent turnaround of RVP due to winning contracts from the U.S. government, and becoming more well-known, has allowed the company to earn about $100 Million in the past three years. This $100 Million Net Earning is the main contributor to our assessed liquidation value of $2.25 per share. During 2022 10Q3, with no U.S. government purchases, the company generated $23 Million in Sales. However, a $700,000 loss from the operation is recorded for the same quarter. Looking ahead, we believe Retractable Technologies will be able to maintain annual sales of about $80 Million due to the increased international sales. Conservatively speaking, we think the company should be able to at least break even due to its effort to cut costs, 90% drop in freight cost and the expected investment earnings from its $26 Million Holding of marketable securities would all contribute to the bottom line.
Buying the shares of RVP is profitable from several perspectives. The estimated liquidation value can be computed by taking the total current asset of $91.7 Million, less the total current liability and long-term debt of $16.6 Million. The other long-term liability is excluded because this originated from the $81 million government funding that requires no repayment. This computes a liquidation value of $75.1 Million or $2.25 per share. We are grateful to have the opportunity to purchase RVP under $2.
The valuation of tangible book value can be computed by the sum of the $75.1 Million liquidation value and the $59.25 Million after-tax value of the newly built factory. The after-tax value of the newly built factory can be estimated by taking the $75 Million of Other Long Term Liability (the remaining value of the new facility from the $81 Million government funding) multiplied by 0.79 to account for the 21% tax that arises as amortization occur over time. This computes to $134.45 Million or $4.03 per share. This price level is our price target in the case of RVP breaking even in the 4th quarter of 2022, providing a quick 100% upside from the current price level of around $2 per share.
RVP initiated a stock repurchase program in June 2021, when the company's share price was trading around $10 per share. In 2021, with no strong recession fear, the management stated that the company's share was significantly undervalued. One could argue that the management believed RVP was at least worth $10 per share during a pandemic when demand for syringes was high. In January 2023, Bill Gates warned Australia to be ready for the next pandemic, which could be man-made. While we do not wish to see another pandemic in our lifetime, we believe there is a good chance of RVP trading above $10 per share during the next pandemic because RVP traded at a high of $20 during COVID.
Investors should note a few risks with this company. First, retractable Technologies had difficulty remaining profitable because it has fixed General Administrative and Selling expenses of around $11 Million. This is evident in the years 2018 and 2019. On the plus side, General Admin & Selling Expense in 2019 is approximately $13 Million to support a Revenue of around $80 Million. This is the level of Revenue that we expect for the company due to the increased demand from international sales. However, it is still possible that the company would be back to having negative net earnings if its Sales were to drop back to the $30 Million level last seen in 2018. In such a case, the share price of RVP might never reach our price target of around $4. In addition, management has reported to SEC on its undervalued share price, indicating that its stock price is being manipulated to such a low level. Therefore, in the near term, the share price of RVP may continue to trade at a depressed level. On the plus side, we believe this depressed share price level provided the perfect timing for building a sizeable long position in this $67 Million Microcap company.
Retractable Technologies is a hidden gem because it has reported a $75 Million liability that requires no repayment, resulting in a $2.25 per share liquidation value for the RVP's stock. Being chosen by the U.S. government helps advertise its syringes internationally, and we expect the company to at least break even in the next quarter going forward. Our conservative price target of $4.03 per share based on the company's asset value and the 2021 insider valuation of $10 per share during a pandemic makes the purchase of RVP at $2 an attractive buy.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.