Arotech's Massive Equity Raise Foretells Bleak Future; Business In Rapid Decline; Stock Headed To $1.75

Jul.11.14 | About: Arotech Corporation (ARTX)

Summary

After close on 7/10/14, ARTX announced another public offering of stock. Post-deal, we estimate shareholders will have been diluted by nearly 50% since 12/31/13.

Management unloaded $120,000 of personal stock just 8-days ago at a price of $4.46. Now they announced a public offering with the stock trading in the mid $3 range.

Sharecount growth is outpacing profit growth by 400%, according to our estimates.

Business has materially worsened with Management reaffirming guidance, only to cut it weeks later. Our checks indicate business has further deteriorated.

Point #1: Shareholders Have Been Diluted By More Than 50% Since Start of Year.

As of 12/31/13, Arotech (NASDAQ:ARTX) had 16.2 million diluted shares outstanding and as of 3/31/14 it had already increased to 20.2 million. Even worse, this does not include 0.8 million shares for the UEC deal on 4/1/14 or our estimate of 3 million shares from the 7/10/14 announcement. Pro-forma, we estimate the sharecount has increased a staggering 50% -- from 16.2 million to 24.0 million shares. That would be acceptable if profits were growing at the same rate, but in fact, profits are declining!

Point #2: Sharecount Is Up Massively While Profits Are Declining.

On April 1, management issued guidance for 2014 EBITDA of $8-8.5 million, including the UEC acquisition. On the Q1 earnings call 5/14/14, the CEO reiterated the guidance saying "We think, at this point, that the guidance we provided is still good." Just 5 weeks later on 6/23/14, ARTX lowered EBITDA guidance to $7.8-8.3 million. Based on our research, we believe business will deteriorate and leave the actual numbers to come in materially lower than this guidance.

As we discussed in our initial report, backlog is declining materially, but revenues have yet to fall. In Q1, backlog declined another 11% while revenues increased 2%. We believe the significant decline in backlog foretells future revenue declines.

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Source: Company filings. Revenue data is last twelve months.

Point #3: Management Continues to Sell Stock While Diluting Its Shareholders

As we discussed in our initial report, Management consistently unloads its personal stock just as the company tries to sell stock to shareholders. They did it again! On July 2, the CEO sold 8,500 shares at $4.46, the President sold 3,000 shares at $4.46, and the CFO sold 15,000 shares at $4.46. In sum, Management sold a total of $120,000 of stock at $4.46 just 8-days ago and is now trying to sell stock to shareholders in the mid- $3.00 range!

Point #4: Stock is Worth No More than $1.75/Share

As we highlighted in our previous report, we thought the stock was worth $2/share. We now believe EBITDA will be closer to $6.5 million than to the previous $8.3 million estimate. We are also adding in our estimate for the announced public offering. We use the same 9.3x comp multiple to arrive at a $1.75/share target price. Given the quality of earnings, the target multiple should actually be far lower but we leave it in to be conservative.

Price

3.76

 

2014E EBITDA Guidance (Midpoint)

6.5

Shares Outstanding

24.0

 

Peer Multiple

 

9.3x

Market Cap

90.2

 

Enterprise Value

 

60.4

             

Net Debt (3/31)

-2.0

 

Less Adjusted: Net Debt

18.4

Debt for UEC

22.5

 

Market Cap

 

41.9

Stock For UEC

3.4

 

Shares Outstanding

 

20.2

Public Offering (7/10/14)

-11.0

 

Per Share Value

 

1.75

Earn-out

5.5

         

Adjusted Net Debt

18.4

         
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Disclosure: The author is short ARTX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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