- Arotech is significantly undervalued despite being a small and growing firm with promising future bullish catalysts.
- ARTX offers solid fundamentals, highlighted by the Piotroski F-Score, that are rarely seen with companies comparable to it.
- Taking all into consideration we believe that ARTX is currently undervalued by 50% and are setting a short-term price target of $7.85.
Arotech Corporation (NASDAQ:ARTX), according to Google Finance, is a "defense and security products and services company engaged in three business areas: interactive simulation for military, law enforcement and commercial markets, batteries and charging systems for the military." The analysis we will discuss in the article not only provides support for its current price of $5.25 (close of March 26, 2014) but it also suggests ARTX still has a lot of room to grow.
ARTX, according do our data from AAII, currently trades at a 1.11 price to sales. It is a little difficult to pick an industry to compare to ARTX because it is involved in diverse operations so we are using companies that meet the following constraints:
- Located in the United States
- Classified as a Technology Company
- Market Cap greater than $25 million but less than $1 billion
- Price to Sales less than 10 and Price to Earnings less than 100.
The average price to sales of companies that meet the constraints above is 1.94 which is currently 75% greater than ARTX's price to sales of 1.11.
ARTX also currently trades for a 24.65 PE. The average PE of companies that meet the constraints above is 33.7, a is 37% premium to ARTX.
Let's now look at sales growth to try and determine why ARTX is trading at such a discount to companies similar to it. Trailing 12-month sales growth for ARTX is currently 18.3% while the average trailing 12 month sales growth of the companies that meet the constraints above is 6.6%. Sales growth from 2011 to 2012 was 29% and sales growth from 2010 to 2011 was also impressive at 15%.
So ARTX is trading at a discount, in terms of price to sales and price to earnings, to companies similar to it while growing at a faster rate. I would argue that the above average sales growth should translate into ARTX trading at a premium in price to sales and price to earnings compared to the average. As a result, we believe that the current price is undervalued by 50%.
Fundamentals With Piotroski
ARTX currently has a Piotroski F-Score of 8 out of 9. Only 6% of the stocks that meet the constraints above have a Piotroski F Score greater than 7. For an explanation on how the score is calculated please visit this article. Let's take a look at how stocks with a Piotroski F-score greater than 7 while meeting the same constraints listed above have performed since 2003.
The graph above displays the backtest results of the strategy. The Equities Lab back test buys stocks when they pass the strategy then sells them when they no longer pass with a weekly rebalance since 2003. The total return of the strategy is 608% which represents a 19% annualized return.
- On March 6, 2014, ARTX announced that it had a "successful lab test of iron flow battery for grid storage" according to this release. ARTX states they have filed a patent application for the technology which could eventually provide a large stream of revenue for the company in the future as well as make it an interesting buyout target.
- ARTX, according to this transcript, has $74.4 million in backlogged orders that equals about 85% of its entire 2013 revenue.
- Although we may not agree with the $16 price target, this article published by 3D Analytics further discusses the exciting future catalysts. They include the expected growth in demand for lithium-ion electric car batteries and expected growth for unmanned vehicles, which ARTX produces lithium batteries for, as catalysts for the stock.
- ARTX is expected to release earnings on March 31, 2014. The company, in its Q3 conference call, states "In terms of revenue guidance, we have increased our expectation to between $89 million and $90 million for the year against our earlier range of $87 million to $89 million. We tend to be very conservative, so we've decided this was a sound adjustment." Revenues in Q1, Q2, and Q3 so far have totaled $67.64 million. So in order for revenue to meet the high end of the total year guidance of $90 then it must be $22.36 million. The strong quarter of quarter growth the company has experienced for Q1, Q2 and Q3 compared to the same quarter in 2012 should continue into Q4 for 2013, thus ARTX looks like a solid bet to beat the single analyst estimate of $21.7 million this quarter. The company will be reporting earnings during a time where the stock is being heavily traded and showing a lot of volatility. The revenue beat alone could send this stock much higher. Having a short position on this stock heading into March 31, 2014, may be dangerous.
The graph above shows ARTX's wild share price ride since January of 2013 up until today. It has returned over 200%. ARTX's institutional ownership is plotted on the graph and represented by the gray line, It has been on a steady rise since the start of 2013. Look for institutional ownership to continue its climb as ARTX is becoming more and more of a solid investment rather than a small-cap speculative play.
Taking everything into consideration we believe that ARTX is currently undervalued by 50%, and that may be conservative. We came to this conclusion based on our valuation and fundamental analysis as well as taking into consideration the potential for bullish future catalysts described earlier in the article. The closing price is currently $5.25 so we are setting a price target of $7.85.
Disclosure: I am long ARTX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.