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WSI Industries (NASDAQ:WSCI) recently reported excellent sales and earnings in its 2012 fiscal fourth quarter. Revenues increased by 38% compared with Q4 2011, and earnings were up by 76% relative to the same period last year. As an overview, WSCI is a contract manufacturing company based in Monticello, Minnesota, and they provide precision contract machining for various markets including recreational vehicles, energy, aerospace and defense, and biosciences. Revenues for fiscal 2012 amounted to $32.5M, up 30% from the $25.0M of sales reported during fiscal 2011. Its 2 largest customers are multi-billion dollar enterprises and leaders in their respective industries: Polaris Industries (NYSE:PII) and National Oilwell Varco (NYSE:NOV).

Continued strength in its key markets of recreational vehicles (sales up 19% for the year) and energy (up 78%) were the drivers in the company achieving its highest fiscal year revenues since 1992. WSCI also announced during the fiscal year significant growth opportunities, including future new programs in its recreational vehicles, energy, and aerospace segments. Perhaps even more importantly, the company announced an aggressive $3.5M expansion to double its plant size. This additional manufacturing capacity is expected to come online by the early part of 2013. Furthermore, the company has already stated that it expects sales and earnings for fiscal 2013 to exceed the strong levels realized during fiscal 2012.

Although the stock is up about 30% since I last wrote about WSCI in early July, valuation remains very attractive. The company's price/earnings ratio on a trailing 12 months basis is 15, which includes earnings of only $0.10/share for the first half of fiscal 2012 (which included significant initial startup costs for new programs). Based upon the company posting $0.42/share of earnings during the second fiscal half of 2012, look for the first half of 2013 to compare quite favorably over the results of the previous year. The company's current level of business could easily lead to earnings of $0.30/share or more for the first half of fiscal 2013, which would then imply a P/E ratio of around 10 at the current stock price of $7.60/share.

WSCI continues to pay a healthy dividend of $0.04/share even despite significant capital needed for its plant expansion and future machinery purchases. In addition, it continues to have a strong balance sheet with a book value of around $4/share. There are only 2.9M shares outstanding and daily trading volumes are typically quite low, which can cause significant price spikes when trading volume increases on any given day.

I continue to own shares in WSCI and am very pleased with management's resilience to grow the business from the depths of the recession during 2009. With the company's continuing ability to attract and retain a solid customer base along with demonstrating operational excellence in achieving strong earnings for the last 2 quarters, the future continues to look very bright for this scarcely-followed nano-cap stock.

Source: WSI Industries: Strong Earnings Growth And Aggressive Business Expansion