I have been following micro cap defense contractor VSE Corporation (NASDAQ:VSEC) closely and continue to be impressed with its growth trajectory. Here is some general background based on the results from its second quarter, and my most recent thoughts on its valuation can be found here. I have recently come across another promising defense contractor, CPI Aerostructures (NYSEMKT:CVU). By any standard, this is a small company. Its market cap is only $42M (which makes it small even compared to VSE whose market cap is $192M), but it seems poised to emulate the success which VSE currently enjoys.
CPI Aero produces structural aircraft parts for the U.S. Air Force, other branches of the armed forces, and leading defense contractors. It supplies such programs as the C-5A cargo jet, the T-38 Talon jet, the A-10 Thunderbolt attack jet, the E-3 Sentry AWACS jet, the UH-60 Black Hawk helicopter, the Sikorsky S-92 helicopter, the Gulfstream G650, and others.
The stock trades on the American Stock Exchange with 5.97M shares outstanding and a float of 3.53M shares. This is a thinly traded stock with an average daily volume of just over 7,700 shares. Insiders hold a good chunk of shares and there is a nice level of institutional ownership. There are no analysts covering the stock. It is unusual for a company this far under the radar screen to hold conference calls, but this one does. The second quarter 2008 conference call is well worth a listen.
This company has made great strides in the last two years. Revenue in 2006 was $17.9M and grew to $28M in 2007. The first half of 2008 has produced revenue of $16.9M and the company is projecting 2008 revenue of $35M. This would represent an annualized growth rate of 40%. Net income (loss) in 2006 was ($1.3M) and grew to $1.9M in 2007. The first half of 2008 has produced net income of $0.8M and the company is projecting 2008 net income of $2.6M, a year-over-year increase of 37%.
In the recent earnings release, Edward J. Fred, President and CEO, supplied quite a bit of detail concerning recent contract awards and, based on these and on other long-term information currently available, he provided a long-term outlook for 2009 through 2011. He projects 2009 revenue to be in the range $42M-$45M with net income in the range $3.9M-$4.3M. Furthermore, using 2008 as the baseline, and for the three-year period ending in 2011, he projects an annualized growth rate for revenue in the range 30%-35% and an annualized growth rate for net income in the range 50%-60%.
The company has a market cap of $41.8M corresponding to a stock price of 7.00. With a trailing-twelve-month EPS of .31, the TTM PE now stands at 22.6. In order to value the company, I will look at owner earnings [OE] which is defined as net income plus depreciation and amortization less capital expenditures and then use a DCF calculation to determine the growth expectation which is implied by the current price.
Based on the owner earnings for the first half of 2008 and on the company's projection for its 2008 net income, I estimate 2008 owner earnings as $2.5M. With $207K in cash and no long-term debt, the company has an enterprise value of $41.6M and therefore is trading at an EV/OE multiple of 16.6. A DCF calculation, using an 11% discount rate, a 5-year growth period, and no terminal growth shows that the current price is based on the assumption of 15% growth. Since the company seems well-poised to easily exceed that level of growth, the current price appears to be quite attractive.
Stock position: Long.