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Is The Pullback Over For Sypris Solutions?

|Includes:Sypris Solutions, Inc. (SYPR)

Sypris Solutions Inc. (NASDAQ: SYPR) is a Louisville, Kentucky based outsourced services and solutions provider in the areas of aerospace and defense electronics. The company operates through two business segments. The Industrial Manufacturing Group (89 percent of revenue) supplies forged machine components for trucks, commercial vehicles and the energy industry. The Electronics Group (11 percent of revenue) provides manufacturing and technical services in the field of complex data storage systems. Sypris operates primarily in the USA (70 percent of revenue), and in Europe and Mexico (30 percent of revenue). The revenue stream for the company usually comes from multi-year contracts with corporations and governments.

Sypris Solutions released its Q1 2014 results in May 2014, which saw revenue increase by 7 percent to $84 million. This was due to a pickup in demand in the industrial manufacturing group as contracts from auto manufacturers in the U.S. The electronics segment also showed 16 percent growth over the past year by signing a new contract with the Singapore government for the development of a cyber-security laboratory. Gross margins increased by 220 basis points over Q1 2013, and by 390 basis points over Q4 2013.

Net income increased to $1.65 million from a loss of $6.4 million in Q1 2013. Adjusting for an impairment loss of $6.9 million in 2013, the adjusted net profit would have been $0.5 million.

The outlook for 2014 is positive with the upturn in the vehicle industry expected to continue and drive growth in the industrial manufacturing segment, while the company is diversifying in the electronics segment to reduce dependence on the defense sector which is currently facing spending uncertainty in the U.S.

In addition, the cyber security lab feature is now complete, according to a May 12, 2014 update from the company. Therefore, the project with the Singapore government can be expected to start providing revenue later this year, while more contracts could be signed for this product in future. This will enable the electronics segment, which made a loss of $0.6 million in Q1 2014, to become profitable by year-end.

Capital expenditure for the current quarter was only $0.6 million compared to $0.95 million last year. This needs to increase in line with the higher auto demand expected in 2014. The cash balance in March 2014 was $19 million, flat compared to March 2013. But the cash generated from operations increased to $2.5 million from only $0.5 million last year. The company settled $0.5 million worth of debt cutting the figure to $23 million. The tangible networth to debt cover was 1.8x as on March 2014. Further increase in leverage could be a cause for concern for the company.

The stock price was beaten down in 2013 to between $2 and $4 per share from highs of $7 in 2012. This was pegged to revenue and profit decline during the year because of the downturn in the automotive sector in the U.S., and lower defense spending affected performance. Nonetheless, the stock has rallied in 2014 after a positive EPS of 8 cents in the March quarter, to the $6 level. Continuation of this positive performance in successive quarters could take the stock to its 2012 highs of $7.6 or further.

Therefore, there is a genuine argument that the current pullback could be over, with the stock now aiming to retrace to recent highs.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: SYPR