Cash-rich Somero looks too cheap

Since the mid-1980s, the Florida-headquartered Somero has manufactured and distributed machines that automate the process of spreading and levelling concrete on commercial floors. These machines are more efficient, quicker and generally cheaper than conventional methods and are used by flooring contractors and construction groups in more than 90 countries. Chief executive Jack Cooney readily admits that "anyone can reverse engineer" the company's patented technology, safe in the knowledge that any new competitor would struggle to replicate Somero's round-the-clock training and support.

That has led to a sticky client base and unrivalled industry leadership, most clearly demonstrated in its most mature market, North America. Last year, strong demand for replacement machines and technology upgrades, as well as price rises and a 14 per cent jump in cement consumption in non-residential building construction contributed to a 32 per cent leap in regional sales to $49.2m (£34.5m). That's on top of 47 per cent sales growth in 2014 alone. What's more, industry analysts at FMI expect US construction to grow a further 7 per cent in 2016 and steadily until 2019, underpinning sales momentum in Somero's core market.

Management stated as much in recent full-year results, noting that December's record sales have continued into this year, and are supported by lengthy project backlogs for its customers. European sales - which are managed out of the UK - also ramped up 58 per cent to $5.7m, and sales in the Middle East and Southeast Asia were also good.

Cost reductions, improved productivity and price increases helped boost last year's gross profit margin by 180 basis points to 55.8 per cent and within touching distance of highs set in 2007. Less positive was the 35 per cent decrease in sales in China to £6.1m, where a slowdown in the construction sector hit equipment purchases. However, a trial to provide third-party financing to customers has so far been "very positive". While this may weigh on next year's cash flows, the rewards of establishing a market in China could be huge as its concrete consumption is more than 15 times that of the US. Investment in Somero's Concrete College in Shanghai should support these efforts. Somero looks well placed to fund this growth with net cash representing more than a tenth of the company's market cap, having risen $6m last year despite $3.3m of dividend payments and $4.2m of capital expenditure.