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Tamra Doubles Sales and Earnings in 6 Years

- By Holmes Osborne, CFA

Norway-based Tomra Systems ASA (TMRAF)(TMRAY) is the largest manufacturer of reverse vending machines in the world. Sales and earnings have doubled in the last six years. Recycling is on an upward trend with concerns about the environment.

The stock trades for 244.50 krone ($28.67), there are 147.74 million shares and the market cap is 36.1 billion krone ($4.185 billion). Earnings per share were 5.01 krone and the price-earnings ratio is 48.8. The dividend was 2.5 krone and the dividend yield is 1%. So far, the stock doesn't look cheap.

Sales grew from 6.1 billion krone in 2015 to 8.6 billion krone in 2018. That's growth! I can see why the stock isn't cheap. Earnings grew from 600 million krone to 740 million krone.

Cash flow from operations has been steady at about 1 billion krone over the last four years and free cash flow has been about 500 million krone. The stock isn't cheap on a free cash flow basis. The balance sheet is very strong with 397 million krone in cash and 2.3 billion krone in receivables. The liability side shows no payables and 874 million krone in debt. Earnings before interest, taxes, depreciation and amortization margins are 20%, which is the highest they have been in 10 years.

Tomra manufactures machines that collect and sort trash, bottles, food and other items. Half its revenues come from sorting and half from collecting. The company got its start in the 1970s by making machines that could collect bottles. Like most companies, it has grown organically and through mergers and acquisitions. In 2018, food sorter BBC was acquired. In 2016, New Zealand-based Compac Sorting was acquired.

To further break down the divisions, 34% of the sorting business is in food, 13% recycling, 3% mining, 38% in what the company calls reverse vending and 12% in material recovery. Reverse vending is when a customer returns a can or bottle. So essentially, Tomra is a tech company or automation. More machines doing the work that humans once did. I've looked at so many companies in this boomind industry: Ball (BLL), Fanuc (FANUY), Keyence (KYCCF) and the list goes on.

The company lists many trends which make sense. One is the online buying Amazon (AMZN) phenomenon. There will be bad drops to recycle refuse from the online retailers. There will be a lot more self-service in retailers, which makes sense. Self-checkout is only going to get bigger. Biodegradable packaging is becoming popular. I'm not sure how this will affect Tomra. Perhaps there will be a better way to recycle biodegradable materials.

The process works like this: the trash or food enters a conveyor belt, falls freely or goes down a lane. Next, a computer must identify what it is looking at. Thus is done through cameras, lasers, X-rays, infrared, spectroscopy and other ways of identification. It then can sort the items. Tomra has a machine that can quickly weed out bad potatoes from good ones. Another machine can sort quartz and gold. They also show gummy bears. There is no such thing as a bad gummy bear, they're all edible.

Major food customers include: PepsiCo (PEP), Tyson (TSN), Nestle (NSRGY) and Kraft Heinz (KHC). That is just a few. I didn't see Coca-Cola (KO) on the list.

The machines for trash recycling are as large as one can imagine. The refuse goes down a conveyor belt. Humans must do some sorting and remove larger items. This video on YouTube shows the process for reverse vending. Machines can sort cans and bottles. Further, it can shred and crush aluminum and plastics.

The mining division is only a small part of its sales, but I find it very interesting. Sorting out the rock from the mineral has always been part of the process. Finding and mining the ore is one thing, getting the ore out of the rock is another.

The largest shareholder is Investment AB Latour with a 26.3% holding. The holding company is controlled by a family with the last name of Douglas. They also control Securitas AB (OSTO:SECU B).

I found the stock by reading a post on Sum Zero by Dillon Lanius. He had a target price of 245 krone last May when the stock was trading at 177 krone. Good call!

I could go on and on about how the world is growing and we need to recycle what we use, but I'm sure you already understand this. Between 4.8 and 12.7 million tons of plastic enters the ocean every year. Most countries are trying to find ways to decrease this. The same can be said of food sorting and mining. As the population grows, the technology to sort these items will grow too.

I'm not going to buy the stock because it's too expensive. The time was last year, when the guy from Sum Zero made his case. However, Tomra is another great automation company that will continue to grow. When I say grow, I mean long term. These automation companies follow the economy, which has been on a 10-year roll. I've looked at Fanuc's sales going back to the 1970s and they are cyclical. Tomra is another great company for the individual investor. It's large enough for you to invest in, but too small for Wall Street to follow.

Disclosure: We do not own the stock.

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This article first appeared on GuruFocus.