TOP IDEAS: Cash-rich Galvanic Applied Sciences Inc. (TSXV: GAV) is worth a good look for small cap value investors.

With a name like Galvanic Applied Sciences Inc. (TSXV: GAV - $1.46), this Company is not a magnet for spontaneous investor attention. Less sexy is the Company's products: hydrogen sulphide analyzers, gas chromatographs and liquid process analytics instrumentation. But for small cap value investors the beauty of Galvanic shines from within: the financial results relative to its current stock price.

Fiscal 2013 is turning out to be another good year for Galvanic. For the first nine months which ended on January 31, the Company reported it earned $0.17 per share (fully-diluted) in earnings. Consistent over the past two years is Galvanic's annual run rate close to $17 million in revenues and earnings of $0.22 per share. Despite some momentum as of late, the Company's stock price still trades inexpensively at about 6.6 times, trailing 12-month (TTM) earnings.

Galvanic has two major operating segments. The larger unit, Galvanic Canada, headquartered in Calgary, Alberta, develops analyzers for the natural gas processing market and electronic flow and pressure measurement products sold into the gas distribution market. Galvanic Lowell is the Company's US-based unit stationed in Lowell, Massachusetts. Galvanic Lowell markets liquid process analytics instrumentation for an array of industries including water and chemical, petrochemical, food, and pulp and paper. Both units sell their products within their domestic markets and internationally. Gross margins on product sales at each operating segment average a healthy 45%-50%.

Aligned with the gross margins, the Company's management has demonstrated a disciplined approach to its cost structure which supports the strong EBITDA margins reported, over 20% the past two years. Because of the prudent management, as of January 2013, the Company has amassed cash and marketable securities of approximately $10.5 million. Galvanic's balance sheet is completely free of any debt.

Central to our thesis of investing in the shares of Galvanic is the strong balance sheet which provides the Company with the flexibility and resources to pursue many options to grow its business, which we feel is not fairly priced in its shares.

If we take a conservative approach and assume no growth, Galvanic's stock currently trades at a valuation of about 3.1x EV/EBITDA based on 12-month historical results. For value-driven small cap investors we suggest that shares of Galvanic should be accumulated to a high of $2.30 from its current trading level of $1.46, which would be equivalent to 6.4x EV/EBITDA.

Depending on how the Company's management decides to deploy its growing cash reserves to support internal growth, acquisitions or a combination of both in order to leverage the business, the shares may be able to reach much higher trading prices than our $2.30 target.

Galvanic is very typical of an under-followed small cap company; cash-rich, debt-free, with a share price that does not accurately reflect the current value and potential of the business. But that's okay because it gives opportunistic investors the time to accumulate its stock at bargain prices.

Galvanic Applied Sciences has approximately 15.7 million shares outstanding.

Galvanic Applied Sciences website www.galvanic.com

Author Ownership Disclosure: TSXV: GAV - YES

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