There are two different ways one can look at Dynamic Materials’ (BOOM) fourth quarter earnings release and conference call on March 5, 2009: short term (negative) and long term (positive). Looking at the short term, BOOM came in under analyst expectations in the quarter at .43 vs. an expected .52. However, this miss was caused by a timing issue for a couple of its European projects rather than any overwhelming economic issues. While this is not a problem in and of itself, the company projects revenue to drop 12-20% in 2009. This projected drop is not as bad as some other companies in this economy, but it is still unwelcome news for investors.
As expected, investors reacted negatively to the news causing a 17% drop in the stock the day after the earnings announcement. That would seem reasonable if the stock had not already dropped 33% between Monday and the earnings announcement on Thursday afternoon.
Given the amount the stock dropped prior to the earnings announcement, the bad news should have already been more than baked into the stock price. Since, it still fell drastically after the earnings release, there could be a couple of explanations for the wild short-term movement of the stock price:
- A large holder was trying to get out of its shares and artificially drove the price down;
- There was some kind of leak/insider trading; or
- The market just is not logical at all anymore.
I highly doubt it was number 2, so that leaves either option 1 or 3. Option 1 will happen occasionally in small cap issues for very large holders as the days around a company’s earnings announcement are typically the highest volume days and the easiest time for a holder to sell a large position. This certainly could have been the case, but I have a hard time seeing anyone who has had a large, long-term position in the company and rode it all the way down to single digits selling it there as it is very likely the low point for the stock. That just leaves the illogical option, which seems like the only logical answer in this current economy, especially with the stock now back up 28% off the lows it hit only five days ago.
Moving past the insane trading surrounding the announcement and back to what was actually said; let’s take a look at the earnings report and much more importantly management’s commentary. I think pretty much everyone realizes and expects 2009 to be a pretty weak year universally so let’s not even waste time looking at it. Instead, let’s look at some things that were discussed that could impact the company’s future. Well, I guess I do want to make one quick comment on 2009- even with the negative outlook the estimates the analysts have posted so far appear to be on the conservative side so don’t be shocked if BOOM outperforms in the second half of the year.
Looking long-term, there were a couple of comments/announcements that showed the company is really positioning itself well for the future. The first is that Dynamic Materials is seeing some success in diversifying its supplier base. The past couple of years, this has been one of the key issues, if not the key issue, the company faced. It only used a limited number of suppliers and was occasionally put in line behind the Department of Defense when it made an order for its specific pressure vessel quality (PVQ) steel plates. When the economy is riding high, timeliness can be a deciding factor in a portion of its contracts and having a more diversified supplier base will allow BOOM to have fewer delays and potentially be able to bid on and win more contracts.
A second announcement also played into this theme as well, as the company signed an agreement to utilize a high quality underground facility very close to its current Pennsylvania location, which gives BOOM the ability to expand its shooting capacity. While the company does not have any true competitors in explosion welding in North America and only a slightly higher level of competition in Europe, it does compete with lesser technologies on 20-25% of its potential contracts. Increasing capacity and suppliers will likely allow BOOM to win a greater percentage of these contracts in the future.
In addition to improving its supply chain and capacity constraints, Dynamic Materials is looking to expand the range of end users it targets and has had some success in doing so. During its conference call, management announced that it received the largest order in the company’s history during the fourth quarter: a $14 million alternative energy project. In addition to significance of being the company’s largest order ever in a clearly weak environment, it shows how quickly BOOM can make an impact in new markets. Dynamic Materials was not involved in alternative energy at all until 1-2 years ago and with the large order it now accounts for 20% of bookings in 2008. With the likely increase in alternative energy funding from President Obama’s administration, this client base is likely to grow even more.
Additionally, CEO Yvon Pierre Cariou announced that the company is pursuing development efforts in new end markets such as transportation, nuclear energy and certain defense related sectors. It is way too early to say whether or not they will be successful in their efforts; however, if their foray into alternative energy is any indication it is likely that the company will at least have moderate success in new product development. Even if the company is only successful in one of these three new areas, the developments will only be accretive.
For those of you that will not be able to ignore the ubiquitously weak 2009, here are a couple of numbers to put you at ease. The company is still expected to earn a respectable profit, with analysts conservatively predicting EPS in .80 – 1.25 range for 2009. Additionally, BOOM should be able to generate solid positive free cash flow as it did in 2008, when it netted ~$24 million in FCF as, even with its planned improvements, it is cutting Cap Ex spending by 40% in 2009. Even before adding in any cash flow from 2009, the company has enough cash saved up to pay its planned debt payments in 2009, so there are no worries there either.
Looking at earnings and listening to conference calls does not exactly inspire a rosy outlook with the current economic backdrop. However, if you can do yourself a favor and look past the next year, you can find some companies that are setting themselves up to roar when the economy turns around.
This is for information purposes only. You should perform your own research before investing.
Disclosure: The author has a long position in BOOM.