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January 7, 2011 6:07 pm

Window of opportunity for a game changer

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Ihave already picked my share of the year for 2011 – and you may be surprised to hear that it’s the same as last year

Ihave already picked my share of the year for 2011 – and you may be surprised
to hear that it’s the same as the one I picked last year: Carclo, the producer of precision plastic products. In 2010, its share price gained 67 per cent – but I think there is much more to come.

Carclo has invested heavily in “game-changing” technologies for several years. Now, I am seeing evidence suggesting that pay-off time has finally arrived. In fact, I believe we will soon witness a marked increase in profits.

Small technology-driven companies such as Carclo often receive very little publicity. Journalists and City analysts find it difficult to cover companies they do not fully understand.

Fortunately, I have a secret weapon. A private investor, alias “Wan”, frequently posts on the Carclo bulletin board run by investor website Private and institutional investors regularly benefit from his insights. I am surprised that a City firm has not snapped him up to guide its technology investments. But then the City’s loss is my gain.

Timing is critical when investing in game-changing technologies. Pounce too early, and you risk having to wait until the company perfects its technology and word spreads. Invest too late, and you miss a huge profit opportunity.

My rough rule of thumb is that there is often a one- or two-year window where huge investment profits can be earned – and I reckon Carclo is now approaching this window.

One of its divisions has perfected tools to print virtually invisible copper circuits on a variety of different surfaces. Think of it as “printed electronics”. Experts agree that printed electronics will be a game-changer. Carclo’s offering is much lower in cost
and considered to be technically superior to competitive offerings. Its price advantage is also likely to widen due to China’s recently announced rare earth export quotas. The Carclo process requires no rare earths, unlike its competitors.

Touch-screen mobile phones are one of the company’s many target markets. Forecasters estimate that production
of touch-screen mobile phones is approaching 400m units a year.

Carclo partnered with Silicon Valley chip giant Atmel, the industry’s dominant touch-screen player, to tap this market
– and Atmel recently paid Carclo $1m to secure preferential rights to purchase the company’s unique touch-sensor film. It then elected to make a $10m pre-payment for products. That’s quite a vote of confidence in
my book.

An existing production line, currently being upgraded, will produce 30m-40m telephone-sized units of film a year. A second line with a capacity of 80m-100m units a year will begin to operate later in 2011. Additional production lines can easily be added as demand rises.

For competitive reasons, the company will not issue any volume or profit forecasts. However, my own estimate is for telephone touch screens
to contribute £8m-£10m
a year in pre-tax profits once the second line begins production – assuming Atmel purchases all of the potential output. These figures are quite significant for a company whose total pre-tax profit for the year ending March 2010 was just £4.6m. Even if Atmel merely purchases a small portion of the line’s full potential, profits will enjoy a significant boost.

Tablet computer screens are another exciting printed electronics opportunity. Here, too, the company has partnered with Atmel. Analysts forecast production of
156m tablet screens a year by 2013. Carclo’s output is likely to be installed in the premium end of this market – which those analysts expect will enjoy explosive growth in the years ahead.

Profit potential here is enormous – because each tablet computer screen requires six to nine times the volume of touch-sensor film compared with mobile phones.

What level of profits are we talking about? Here is one back-of-the-envelope calculation to chew on.

I estimate that each
1 per cent of the tablet computer market that Atmel/Carclo equips with touch-screen technology will yield £1m of pre-tax profit a year for Carclo. Given the huge technical and price advantage associated with Carclo’s imprinted film, I suspect that my 1 per cent measure might be woefully conservative. Further growth will come from larger screens on laptop and desktop computers.

Of course, this is tomorrow’s story because some tweaking of the production process is required. Even so, the potential is enormous. A single 19-inch monitor uses the equivalent of 40 mobile telephone units of film.

And the good news continues. Carclo admits to other significant printed electronic opportunities in photovoltaics – solar panels and security systems. Holograms placed on many software disc packages to prevent forgery are an example. So the company has entered into a joint venture with Worldmark,
a leader in this sector.

Carclo is no one-trick pony, either. It has several other profitable operating divisions unrelated to printed electronics.

Its medical products group has just completed several “sterile room” installations. Wan, my valued source, forecasts that the company is gearing up for several large, as yet unspecified, ventures in this area.

So Carclo’s future looks rosy. If my assumptions are correct, I expect the share price to double in the next 12-18 months.

Stock market historian David Schwartz is an active short-term trader writing about his own trades.
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