Is Cubic Corporation Fairly Valued?

| About: Cubic Corporation (CUB)

Cubic Corporation‘s (NYSE:CUB) business consists of the design, development, manufacture, integration, installation, operation, maintenance and support of high technology products and systems. The company operates within three reportable segments; transportation systems, defense systems and mission support services.

The company is also a provider of training, operations, intelligence, maintenance, technical and other support services to the U.S. Government and allied nations, focusing on the defense and transportation markets. The company recently added a cyber security and asset tracking businesses. According to management, the company's transportation systems business is the leading provider of automated revenue collection systems and services worldwide, providing complete turnkey solutions.

Their equipment includes contactless smart card readers, passenger gates, central computer systems, and ticket vending machines for mass transit networks, including rail systems, buses, and parking applications. Other services include customer support, network and web operations, payment media management, distribution channel management, business and marketing support, financial clearing and settlement and outsourced asset operations and maintenance.

The company’s defense systems business includes training systems, communications, cyber security and asset tracking, billing itself as a leading provider of customized military range instrumentation, training and applications systems and simulators. In addition, the company is a supplier of communications products including data links, power amplifiers and avionics systems.

The company’s mission support services business is a provider of highly specialized support services including live, virtual and constructive training; real-world mission rehearsal exercises; professional military education; intelligence support; information technology, information assurance and related cyber support; development of military doctrine; consequence management, infrastructure protection, and force protection; as well as support to field operations, force deployment and redeployment, and logistics.

Cubic Corporation was incorporated in the State of California in 1949 and began operations in 1951. During fiscal year 2011, approximately 56% of its total business was conducted, either directly or indirectly, with various agencies of the United States government.


Financial information presented herein, is based on the company’s most recent SEC Form 10-K filing for year ending September 30, 2011, as filed with the Securities and Exchange Commission on November 21, 2011.

Short-Term Investment Valuation

On the upside, the stock closed recently at $43.92, with First Resistance at $44.96, a 2.4% increase from the recent close, and Second Resistance at $58.33, a 33% increase from the recent close.

On the downside, First Support for the stock is currently at $43.27, a 1.5% decline from the recent close, with Second Support at $36.71, 16% decline from the recent close.

Our Equilibrium number, the mid point between Resistance and Support, is $44.12, which is 0.4% above the recent price.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Cubic Corporation, the company had year over year earnings growth of 21%, ending FY11 with earnings of $3.76 per share.

With a trailing twelve month PE currently at 12, the spread between earnings growth and the PE is about 2, meaning that for an investor focusing strictly on earnings growth, the stock should be trading at $50.93, a $7.01 increase from the recent close.

Fundamental Investment Valuation

Liquidity: The company ended FY11 with Cash on Hand of $13.29, a 6.5% year over year decline, a Current Ratio of 1.98, an 11.2% year over year decline, a Quick Ratio of 1.77, a 10.1% year over year decline, a Cash Ratio of 1.04, a 17.4% year over year decline, and a Cash Conversion Cycle of 64 days a 6.9% year over year improvement. In addition, Goodwill and Intangibles comprised 21% of Total Assets, lowering Book Value from $20.67, to $13.16.

Profitability: FY11 found the company with a Gross Margin of 24.5%, a 12.6% year over year increase, an Operating Margin of 10.4%, a 4.6% year over year increase, Net Operation Profit After Taxes [NOPAT] of 7.8%, a 12.5% year over year increase, an Effective Tax Rate of 27.7%, 16.8% year over year decrease, and Return On Invested Capital [ROIC] of 29.4%, a 37.7% year over year increase.

Debt: The company ended FY11 with Debt of $0.60 per share, a 21.6% year over year decline, and paid an average interest rate of 9.4%, 7% year over year increase. For FY11, the company had a Debt to Cash Ratio of 0.04 to 1 and a Debt to Equity Ratio of 0.03 to 1.

Operational Performance: For FY11, the company turned its inventory over 26 times, a 7.2% year over year improvement. In addition, the company’s Accounts Receivable were outstanding 69 days on average, an 8.1% year over year decline, and its Accounts Payable were outstanding 15 days on average, an 11.4% year over year improvement.

Cash Flow: The company’s FY11 Operating Cash Flow was $4.66 per share, a year over year increase of 25.2%. The company also ended FY11 with Free Cash Flow of $4.05 per share, a year over year increase of 23.5%.

Dividends: For FY11, the company paid a dividend to stockholders of $0.28 per share, a year over year increase of 56.1%. There is no guarantee that the company will pay a future dividend.

Fundamental Valuation: Based on our review of the latest annual financial information for Cubic Corporation, we think a Reasonable Value Estimate for the company is in the $53-$60 range, with a FY11 Strength of Statement of 6, a 23.1% year over year decline.

Investment Pricing: With a Reasonable Value Estimate of $53-$60, we would set a Buy Target of $32, a First Sell Target of $62, and Close Target of $66, assuming a 5 year hold.

Company News

The company was recently awarded a $120 million contract weapons immersive training for the a customer in the Middle East, as well as an Indefinite Delivery/Indefinite Quantity contract for multiple training systems for the US Navy. The company had a funded backlog of $2.163 billion at the end of FY11.

Portfolio Thoughts

Considering a Recent Close of $43.92, an estimated Merger and Acquisition payback of 6.4 years (assuming EBITDA remains the same), year over year earnings growth of 21%, year over year free cash flow growth of 23.5%, and our reasonable value estimate of $53-$60, we believe that on a fundamental investment basis the stock is currently fairly valued, and not a potential candidate for additional research for the Wax Ink Portfolio.

Disclosure: We have no position in Cubic Corporation at the this time, and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.