Summary
- Omega Flex has appeal as a focused niche player in flexible metal tubing.
- 71% insider ownership means that management behavior will be very shareholder-friendly.
- Having grown earnings at a compounded rate of 18.62% over the past decade sets the stage for another decade of great results, but I am not buying at these prices.
I have had my eye on Omega Flex (OFLX) for a few months now. They engineer, manufacture, and sell flexible metal tubing for the transportation of various gases (mostly natural gas) and liquids, primarily in the residential, commercial, and industrial sectors. Due to the recent drop in share price, the stock is getting closer to my buy price of $53 that will generate 12-15% annually, the target rate of return for my portfolio. This article is intended to explain my investment thesis, along with a valuation analysis that resulted in the buy price mentioned above.
Business And Product Line
Natural gas has been used in homes and businesses for decades to space heat and otherwise run appliances. Until the 1980s, rigid black iron pipe was used to transport the gas within the walls of the home. The use of rigid iron pipe presented a variety of cost, efficiency, and safety problems. According to csstfacts.org, those problems include:
- "Rigid pipe breaks in earthquakes and other natural disasters."
- "Multiple joints frequently leak from building movement caused by settling, shifting soil, accidents, or simply deterioration of pipe sealant over time."
- "Black iron pipe can corrode and leak from thinning sidewalls."
- "Black iron pipe is not listed to any national standards for gas piping. CSST piping can withstand the same forces of nature—earthquakes, lightning, tornados—that make black iron pipe crack."
- "Most rigid steel pipe is made in Asia—with no quality control."
- " The rigid pipe joints are a well recognized cause of gas leaks and fires. "
The same source claims that 24 deaths happen every year due to fires ignited from pipe leakage. There are 286 incidents every year that cost more than $50,000.
To address these issues, in 1989, innovators introduced flexible metal tubing to transport natural gas. Omega Flex launched their version of the product, called TracPipe, in 1997.
The Omega Flex 2018 10K discusses the various advantages that flexible metal tubing, formally known as corrugated stainless steel tubing (CSST), has over the rigid pipe tradition:
