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Best Idea EDAC Tech (EDAC) reported strong fiscal 2012 first-quarter results Wednesday. We are raising our fair value estimate on the aerospace component supplier to $23 per share (was $15) as a result of a slightly lower discount rate in our cash-flow model, higher growth and profitability assumptions, and continued confidence in the recognition of the company's burgeoning backlog, which now is roughly 3 times its annual run rate of sales. The shares are currently trading just above $13 each.

EDAC Tech's revenue advanced 19% to a record $24 million in the quarter, blowing by management's conservative high-single-digit guidance offered in its previous report (and our low teens estimate). Net income more than tripled to $1.3 million, or $0.23 per diluted share (beating our forecasts). Revenue in all three of the firm's core segments (EDAC AERO, APEX Machine Tool and EDAC Machinery) advanced in the quarter, while gross profit increased a whopping 55% from the same period a year ago.

EDAC Tech's gross margin surpassed 18% in the period, revealing 4.2 percentage points of expansion from the same quarter a year ago, a remarkable achievement. Management noted that the improved margins reflected a better mix as well as the substantial operating leverage (higher cost absorption) inherent to the firm's business model, a characteristic we're particular fond of during cyclical upswings in commercial aerospace demand.

As throughput (volume) increases at EDAC, we would not be surprised to see the company's gross margins migrate significantly upward to the low-30% over time, levels currently achieved by peer Precision Castparts (PCP). Under this scenario, our existing forecasts would be extremely conservative and a high-$20s fair value estimate may become more appropriate. Peak earnings per share, for example, could hit $2 by the middle/end of this decade. That said, we capture such an optimistic scenario within our margin-of-safety assessment of the firm and consider a high-$20s fair value within the range of potential outcomes.

Importantly, EDAC Tech's backlog jumped to over $310 million at the end of the quarter (compared to $252.1 million at year-end 2011). The firm continues to land orders at a consistent and tremendous pace (its book-to-bill was 3.4 times in the quarter), and we expect the firm's significant exposure to United Technologies (UTX) to only benefit the company through the course of the coming surge in aircraft deliveries by the commercial airframe makers, Boeing (BA) and Airbus (OTCPK:EADSY). In fact, we're just starting to witness the significant ramp up in deliveries. Boeing just today, for example, said it delivered 137 commercial aircraft in its first quarter, more than 30% higher than last year's level.

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Looking ahead, we reiterate our view that revenue expansion for EDAC in 2012 will likely be in the low-to-mid teens (versus management's high-single-digit forecast), a position supported by our view that shipments will ramp up considerably during the end of the current second quarter. Please also note that management guided to high-single-digit expansion in the most recently-reported quarter, and top-line growth was 19%. In addition, we fully expect EDAC Tech to achieve our net earnings per share estimate of $0.98 in 2012 (was $0.95), and we are also raising our 2013 net earnings per share forecast to $1.30 per share (was $1.20).

In the past, we previously assigned a conservative market multiple of 12-13 times next year's earnings (the average of the S&P 500 companies) to arrive at a base-case fair value estimate for EDAC. However, we feel a comparison with Precision Castparts is now more appropriate and a 17-18x multiple should be considered reasonable given EDAC's bright future prospects. By extension, our new fair value estimate for EDAC Tech is $23 per share (17-18 times $1.30 per share), and we have further substantiated this valuation analysis via our discounted cash flow model on the company. Our new fair value estimate represents nearly 70% upside.

Note: EDAC's shares are thinly traded and the stock price could move significantly on large purchase/sale orders.

Disclosure:

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: EDAC's Shares Are Worth $23 Each; Offers 70% Upside

Additional disclosure: EDAC is included in the portfolio of the Best Ideas Newsletter.