- Cubic Corporation represents good value at close to year low.
- Transportation division continues to be awarded contracts. We love Metrocard, Oyster, and Octopus.
- A backlog of $2.428B and Cyberdefense represents an opportunity going forward.
Cubic Corporation (NYSE:CUB) announced earnings for the 3rd quarter after the market close on August 4. The company reported sales for the third quarter of fiscal 2014 were $340.4 million compared to $337.2 million in 2013, as restated, an increase of 1 percent. Net income attributable to Cubic shareholders was $12.2 million, or $0.45 per diluted share, compared to $18.4 million, or $0.69 per diluted share, as restated, in the third quarter of 2013.
The earnings details continued with operating income reported at $19.2 million compared to $26.9 million, as restated, in the third quarter of 2013. Operating income decreased 19 percent in the transportation segment, 50 percent in the mission support segment and 46 percent in the defense systems segment.
Non-GAAP Adjusted EBITDA was $26.7 million or 7.9 percent of sales for the quarter compared to $33.3 million or 9.9 percent of sales in the third quarter of 2013.
Backlog was $2.428 billion at the end of the quarter compared to $2.647 billion at September 30, 2013, as restated, a decrease of $218.4 million. Decreases in backlog for the transportation systems and mission support segments were partially offset by an increase in defense systems backlog.
Before we discuss the backlog and why the firm is a good value after hitting its 52 week low, let's look at the company at a glance.
Cubic Corporation is an 8,200 employee San Diego, Ca, based firm and according to the company's website: "is a global leader in defense, and transportation systems and services.
Their operating segments include:
Cubic Defense Applications - The leading provider of live air and ground combat training systems worldwide, a key supplier of virtual and immersive training systems, communications and electronics products, and an emerging provider of cyber technologies and global tracking solutions for commercial and national military customers.
Mission Support Services - An industry leader in providing comprehensive support services for all echelons of national militaries and security forces in the U.S. and allied nations.
Cubic Transportation Systems - The leading provider of revenue collection management systems and services worldwide."
As the website stated, yes, Cubic does in fact work on systems and services worldwide. Presently they have projects completed or are working in nearly 60 countries.
As an overview of the divisions are:
1) Defense application segment: Defense Businesses and Solutions involving Full Spectrum Training Solutions, Air Combat Training/Air Test Instrumentation Subsystems, Communications and Electronics, Cyber Technologies, Game-Based Learning/Advanced Learning Solutions, Global Tracking Solutions, Ground Combat Training Systems, Immersive Simulation, Integrated Solutions and Innovations, Range Design Solutions, Virtual and Immersive Training Systems. Manufacturing solutions are also included within this group.
2) Mission Support Services (MSS): Mission Support Services is headquartered out of Olympia, Washington. The division operates the business through several legal entities and is functionally organized into two operating groups, one large program and two subsidiaries. The division and groups termed "MSS" are based throughout the continental United States. According to the firm's website the business is focused on service markets for the U.S. Department of Defense Joint community, all U.S. Armed Services, the Department of Homeland Security, selected allied nations, and other government and non-government customers. The groups' business focuses on Training and Exercises, Operations and Analysis, Education and Leadership Development, Maintenance and Logistics, and Maritime Security (including risk management and Cyber Security Concerns).
3) Cubic Transportation Systems: The third division which we tend to see as the "cash cow" is the world renowned Cubic Transportation Systems. Since the days of the early '90s (dating myself now) I remember the first "Metrocard" in NYC. At that time I discovered that Cubic was the solution and service provider. At this time, Cubic has implemented more than 80 percent of the major smart card systems in the U.S. now active today, including Washington, D.C., Los Angeles, New Jersey-New York, New Jersey-Pennsylvania, Miami, Atlanta, San Diego, San Francisco Bay Area, and Chicago. Cubic first entered the international market in 1976 when they were awarded a contract for Hong Kong's MTR. (Mass Transit Railroad). Since that time they have gone on to Bangkok, Singapore, Shanghai, Guangzhou and Kuala Lumpur and Australia's public transport systems. We tend to see this growth continuing. Numerous cities in Asia are struggling with tremendous growth and traffic. Two of these cities, ie. Jakarta and Bangkok are either planning to expand existing public transportation systems or build new networks. When the time comes to establish automatic far and collection services we feel Cubic will most certainly be awarded contracts. The company's solutions are all encompassing and range from enterprise systems for transit to Mobile and Contactless Payment Systems to Adaptable Integrated Systems to Tolling and Road User Charging and Enterprise Systems. It should be noted that the company's manufacturing facilities are based in Tennessee, (convenient to FedEx, of course). Their high quality products with roots in defense contracting allow them to excel in reliability and design requirements. What we find amazing is the variety of services and solutions the firm does well and how they balance the demands and uncertainty of governmental contracts with the steady nature of transportation contracts. Recently,(July 31) they were awarded a six year $85 million Traffic Signals Maintenance Contract set to start on October 1 for London and on July 29, Cubic was awarded over US$700 Million Contract to Continue Service for seven years for 'Electra' ticketing and fare collection services contract in the UK. Residents and travelers, are of course familiar with iconic Oyster card in London (and Octopus in Hong Kong).
Returning now to the recent earnings, share price and valuation, the company later in their earnings announcement stated that it is a "challenging year", according to Bradley H. Feldmann, president and chief executive officer of Cubic Corporation. This was attributed due to what were termed execution issues in Transportation System projects in Chicago and Vancouver, as well as the continued adverse impact of the slowdown in U.S. government spending on the operations of the Mission Support Services business. Based upon Mr. Feldmann's comments and our review we see the company having a strong fourth quarter. Along with the backlogs which we mentioned earlier ($2.428 billion), and growing, the share value at this point represents a true value proposition regardless of economic and geopolitical events. Unfortunately (fortunately for the company) in terms of geopolitical issues, it is more likely for the US Navy and Army and Department of Homeland Security to contract further business with Cubic Corporation going forward to the fourth quarter of 2014 and 2015. As recent events have highlighted the need for tracking solutions and cyber security and Technologies, training security, Defense and Specialized Solutions we can only see growth at the firm. We look at the firm's Global Tracking Solutions and their "Continuous Chain of Custody (C-3) Shipping System" as a growth business due to security concerns for both business and governments. As technology has brought costs down significant in this space we look for future contracts and opportunities for the firm going forward both from government and private firms seeking safe passage of cargo, necessary training and crises management.
The shares closed at $44.72, up +$1.32 as of August 08, 2014 was just off the 52 week low of $40.69 hit on August 5 after the earnings announcement. In our opinion short term value investors liquidated due to disappointment in the numbers. The firm has an attractive book value of $28.83 and a reasonable debt/equity ratio of 14.32. We do concur on the street's consensus earnings of $2.50 for the fiscal year ending Sept 14, but feel the next quarter ending December 14 should result in a surprise above the street high of $.63 and 2015 should exceed the consensus of $2.92. We feel that earnings of $3.09 per share or approximate revenue of $1.50 billion is conceivable for next year. As such we recommend a buy with a six month price target of $50.00 and a one year target of 2x book value of approximately $56.00 or only 18xs earnings. Many of course would consider this to be an aggressive target. We look for Cubic to be a defensive stock (no pun intended) in a changing market environment in 2015 going forward as their services and support are now needed more, not less, in the years ahead.