Earnings Call Boosts Flagging ASEI Shares

| About: American Science (ASEI)
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American Science and Engineering (NASDAQ:ASEI) continues to keep investors on their toes -- they released earnings yesterday that seemed a little disappointing, which brought shares down by about 10% immediately. Then, during the conference call at 11am that day, assuaged whatever concerns folks may have had and watched the shares recover dramatically during the course of the call.

The shares closed at $56.01 on Friday, after a nice run following their recent contract wins, and opened yesterday after the earnings press release at $51, then dropped almost immediately to $50. The shares recovered throughout the earnings call to get back to near $55 as I write.

ZBV Delay Sinks Earnings

The reasons for the decline were not surprising -- their EPS number was, depending on whether analysts were taking into account options or not (options have generally run 15-20 cents per share per quarter), either a slight beat or a dramatic miss, but more importantly the sales were down. There was a 40% decrease in sales YOY (from their highest-ever quarter), and a 1% decrease from the prior quarter, along with increased selling costs as they're recruiting more salespeople to drive overseas sales and hiring more engineers to work on some big new contracts.

CEO Anthony Fabiano addressed the weaker sales in the call: "We expected higher revenue in Q2, but unfortunately the timing worked against us" -- they record revenue when the customer accepts the product, so a delay in their recent huge Z-Backscatter Van [ZBV] order pushed a lot of the sales out of the quarter. Those sales will still be there, and will strengthen the next couple quarters.

And to back that assertion up, there's an all-time high in backlog thanks to $87 million in bookings this quarter (it's now at $117 million), which is by far the most important thing for this company -- they're making the deals, and keeping existing customers very happy. Much of that backlog should turn into sales within the next year or so.

ZBV sales and matching service contracts continue to be the major sales driver, as their three other big products (Omniview Gantry scan, SmartCheck, and Gemini package check) are slowly getting traction, and in some cases hitting minor delays for various reasons.

R&D was down significantly by more than 30% in the quarter, which also frightened some investors, but that should really be a one-quarter phenomenon forced by the reallocation of resources to bid on the CARS program that they ultimately won. Management emphasized that they don't see any long term reduction of R&D, and in fact they just got an R&D contract to "ruggedize" the ZBV for harsh terrain (they're pretty basic large vans/panel trucks now), which might significantly expand the market.

The marketplace is certainly still ripe with opportunity for AS&E -- they expect to sell significant quantities of ZBVs and other products to both the DOD and NATO in the years ahead, even after the record-setting ZBV order they got at the end of the last quarter. And regardless of the guesses that are put out by analysts from time to time about the top of the ZBV market, there doesn't seem to be any indication that they've come close to saturating the market.
AXEI ZBV truck
Management did note that the DOD focus on Iraq may mean that other, smaller missions and locations aren't getting the funding they need to get their requested ZBVs at the moment, which ought to change over time.

The company also provided updates on all their major products during the call.

They were quite excited about a new US Customs order, since the Customs ZBVs were targeted for smuggling and border protection, which indicates an expansion of demand -- AS&E has very few sales into border security just yet, but it's a huge potential market for them.

News on Other Products

Omniview Gantry, their big container/truck scanning system, is getting good traction. They've made four sales now, though they're finding that this cargo scanning market is extremely competitive.

The Containerized Advanced Automated Radiography System [CARS] nuclear detection contract that they announced a couple months ago was a huge win. WMD detection is a targeted growth area for ASEI, and this is really helping them to break into this sector.

Gemini is getting a lot of attention for building security, and can easily replace most of the inferior airport and facility package checkpoints -- there was some buzz amongst the analysts about a possible big for Gemini in airports, but AS&E has always been careful to note that they're not pushing in that direction because of the dramatic amount of competition in that market ... and they didn't reiterate those concerns this time, which might mean nothing or might mean that they have a real airport luggage scanning opportunity.

SmartCheck's TSA pilot is still delayed, but they are continuing to demonstrate it internationally and have made at least one sale.

This is a company that I would never try to trade for the short term, because of the variable scheduling of these big contracts, the lump earnings, and the uncertainty of "making the numbers" in any given quarter would give me heartburn ... the sales they just made to Customs, for example, followed very protracted testing by the department over two years.

But in my book, things are continuing on pace for ASEI. I only regret that I wasn't prescient enough to pick up some new shares at yesterday's $50 bottom. I continue to hold ASEI shares that I purchased at $52, $47 and $37

ASEI 2-day chart

ASEI chart