We are fundamentalists by nature, but technical indicators can be quite helpful to confirm that the rest of the market is beginning to take seriously a company’s fundamental potential. We believe last week’s trading patterns reflect resurgence in bullish sentiment in Dynamic Materials Corporation (NASDAQ:BOOM), probably due to the sizable order received two weeks ago for explosion welding work. In the last two days of trading last week, we observed bullish indicators in the BOOM candlestick chart and positive divergences in the Accumulation/Distribution Line.
We also note that money flows suggest buying pressure. Just before the order announcement, we had expected just the opposite eventuality - a retreat in the stock price to levels where our trading guide suggests investors can begin to accumulate shares again.
We believe this sentiment could propel the stock closer to our price target of $38.00. Some investors might ask why stop there. Indeed, we do not believe the story is over for Dynamic Materials. Our field work suggests there is considerable more opportunity for capture of market share and consequently for top-line growth. Nonetheless, the Company’s markets are cyclical and we are concerned about overpaying for the stock.
Our price target implies a price-earnings multiple of 20.3 times our 2007 EPS estimate of $1.87 and 17.7 times our 2008 EPS estimate of $2.15. In our view, it is a bit premature for the stock to begin trading on 2008 earnings potential given that visibility into the year will not become reliable for several more months. What has investors’ attention is a significant order to explosion-welding work valued at $8.3 million. The customer was unnamed but was specified as in the alternative energy sector. The order is expected to be shipped and recorded in the December 2007 quarter. While the order is larger than the average for Dynamic Materials we do not regard it as additive to our 2007 sales estimate of $139.1 million.
Our 2007 estimate assumes 23% growth over the prior year, which was a banner year for the Company. We are reserving adjustments to our quarter estimates to reflect the Company’s commitment to this order throughout the year and the recording of the work in the fourth quarter. At this time our earnings model reflects peak sales recorded in the third quarter a gross profit margin assumption of 37% in the second half of the year.
Our view has been that increased sales should provide better coverage of fixed costs. Assuming no changes in metals pricing, we expect this contract to fulfill this expectations. We will be monitoring execution on this contract and adjust our quarter estimates accordingly.
Disclosure: Neither Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Buy rating on BOOM.
BOOM 1-yr chart