Description
CPI Aerostructures- CVU ($6.30)
Description:
CVU operates an assembly business serving the aerospace and defense industries. Essentially, they assemble some of the large structural components for military aircraft. While military is the bulk of the company’s business (92% for 2001), there is a small (8% in 2001) commercial end-market.
The investment case here is a recent corporate event: the disposition of a second subsidiary, Kolar, whose assets were sold in the first quarter and is now counted as a discontinued business. It is not terribly important to go through a long history of Kolar, but suffice it to say that it was an acquisition that went wrong. Management’s perspective is that it was a victim of the market. The bottom line is that the company’s ongoing business has been a bit of a gem the last few years (to the extent that an assembly business can be a gem), but its results have been masked by the decline of Kolar. So, for the last couple years, while CVU as a whole reported net losses and declining sales, the ongoing business grew revenues from $8M in 2000 to over $15M in 2001 along with increasing net income.
With the dust settling post-Kolar disposition, you have a company whose trailing eps are $0.97 (untaxed) and a stock at $6.30. More importantly, orders are continuing to grow, and the company is conservatively projecting $23M in revenues (up about 50%) for 2002 from this ongoing entity. The company has already reported the first quarter at $0.21 on a fully taxed basis, with revenues up 57% and has indicated that this will be the smallest quarter of the year for both eps and revenues. Gross margins are also increasing on a year-over year basis. (while gross margins were down at 30% for the first quarter from 31% last year, gross margins should hold at this level throughout the year, whereas 2001 was 27% for the full year). Working through the numbers, with the company’s small overhead, on a fully taxed basis, CVU should due just north of $1.00/share, using the company guidance of $23M. I think they will do over $23M this year. For every $1M over $23M you will get about $0.04-0.05/share incremental to the $1+ eps number. For 2003, the company expects to grow revenues and eps at a double digit pace. While there is not huge visibility to this, they do have one contract which will provide an incremental $2M for next year and they are in a good sector for the next few years. Mgmt. has also indicated to me (and I do not think they are a promotional mgmt.) that there are several large contracts coming up for bid over the next six months, which, if won, could significantly boost the outlook for 2003 and beyond.
Catalyst(s)
1) significant undervaluation— seems stock should be at $10+ today (10x multiple at minimum seems reasonable and, if market ever falls in love with it, could easily trade at a much higher multiple given its growth and because it is in the right sector for the next few yrs.). Other small cap names with less growth in the defense sector trade at 12-20x eps.
2) resolution of bank debt due at end of june—should be announced in next few weeks. Mgmt, in last press release, indicated high confidence in this being resolved.
3) potential for new (significant) contract awards over next six months.
Risks/Negatives
1) microcap status
2) poor historical acquisition means one has to question mgmt. strategic acumen
3) stock has tripled in last month, from roughly $2/share
4) percentage of completion accounting
5) until bank debt is refinanced, it’s a bit of a cloud
Catalyst
Catalyst(s)
1) significant undervaluation— seems stock should be at $10+ today (10x multiple at minimum seems reasonable and, if market ever falls in love with it, could easily trade at a much higher multiple given its growth and because it is in the right sector for the next few yrs.). Other small cap names with less growth in the defense sector trade at 12-20x eps.
2) resolution of bank debt due at end of june—should be announced in next few weeks. Mgmt, in last press release, indicated high confidence in this being resolved.
3) potential for new (significant) contract awards over next six months.