For those of us who may consider themselves somewhat technologically challenged, CVD Equipment Corporation (NASDAQ:CVV) is not an easy company to understand and to wrap one's head around. But it may well be worth the added effort.
First, CVD is an acronym for Chemical Vapor Deposition, which is the controlled decomposition of gases used to deposit a material onto a surface. Chemical Vapor Deposition changes the characteristics of materials or enables products to be made that never existed before. This Central Islip, NY-based, $52.6 million market cap company was founded in 1982 by President and CEO Leonard Rosenbaum. Today, it counts as its customers the bluest of blue chips in academia and the corporate sector, as well as government entities. A sampling of satisfied customers include IBM (NYSE:IBM), GE (NYSE:GE), Intel (NASDAQ:INTC), HP (NYSE:HPQ), BP Solar, Yale, Harvard, MIT, and Los Alamos National Laboratories, to name only a few.
Via Yahoo Finance:
CVV develops, manufactures, and sells equipment and process solutions used to develop and manufacture materials and coatings for research and industrial applications in the United States and internationally. The company operates through two divisions, CVD/First Nano and Stainless Design Concepts. It offers chemical vapor deposition systems for use in the research, development, and manufacture of aerospace and medical components, semiconductors, LEDs, carbon nanotubes, nanowires, solar cells, and other industrial applications; and rapid thermal processing systems for use in implant activation, oxidation, silicide formation and other processes. The company also processes annealing and diffusion furnaces for use in diffusion, oxidation, implant anneal, solder reflow, solar cell manufacturing, and other processes; and gas and chemical delivery systems for semiconductor fabrication processes, solar cells, LEDs, carbon nanotubes, nanowires, and various industrial applications. In addition, it provides standard and custom fabricated quartz-ware used in its equipment and other customer tools. The company sells its products primarily to electronic component manufacturers, universities, and government and industrial laboratories, as well as industries, such as aerospace that require specialized coatings.
Growth Potential for CVV
Of all the industries that CVV services, aerospace and medical technology promise extraordinary opportunities that may allow this current no-name to turn into a mini-blue chip itself. In a corporate presentation in March 2016, CVV, quoting a Boeing Current Market Outlook dated August 12, 2015, states:
In aerospace, today's aging fleet and ever increasing demand will drive the need for about 30,000 new commercial aircraft over the next 20 years. Fuel costs account for over 30% of the operating cost of an airline. Therefore, weight reduction and increased engine efficiency are the key drivers for development of new materials. The latest generation of aircraft already contain as much as 53% composite materials by weight. Many new materials require specialty coatings made by Chemical Vapor Deposition.
Growth prospects within the medical technology industry are no less promising. In the above noted March 2016 corporate presentation, CVV also quotes a 2007 Journal of Bone and Joint Surgery study by Kurtz, Ong, Lau, et. al., entitled "Projections of primary and revision hip and knee arthroplasty in the United States from 2005 to 2030." The study stated:
Medical device coatings are widely used to augment product surface function and to improve performance. Coatings help in reducing friction between devices and tissues, and provide excellent surface coverage, wetting, uniform adhesion, wear-resistance, and coating homogeneity. Many medical devices require non-stick coatings over molded, electrical insulation, bio-compatible, or other finishes.
The global medical device coatings market is expected to increase from its current approximately $8.0 billion at an annual rate of nearly 10%. The implant device market currently exceeds $50 billion, with pacemakers being the most well known of these devices. To put these numbers in perspective, today's approximately 700,000 knee replacement procedures are projected to increase to 3,480,000 by 2030.
A Look Behind The Curtain
A legitimate question that one may ask is why CVV is not a much larger company at this point in time. There are a couple of valid reasons, some self inflicted, some not within the company's control. Otis Bradley stated in his December 18, 2014, company report:
First, seeing rapidly expanding opportunities in 2011-12, the company made several small acquisitions to round out its product capability and embarked upon a major facility expansion-specifically, tripling capacity in a year and a half. That expansion move caused a major disruption. in 2013, revenues declined sharply resulting in a loss for the year. As the company reported in late 2014: '2013 can be defined as the end of one era and the beginning of another. The first half of the year was spent on the sale of our Smithtown Avenue facility ($30 million of revenue) and the completion of the renovation and occupancy of our new facility in Central Islip (with 130,000 sq.ft. and a capacity of $100 million of revenue). The second half of the year was spent on increasing sales.' The acquisitions, huge plant expansion and significant addition to employees (including top management), coupled with explosive growth in at least four of CVV's major markets has created extraordinary upside potentials in CVV's publically (sic) announced opinion.
Another reason for the delay in ramping up necessary volume was finally resolved with an announcement by the company on June 22, 2016 that it had received an order for approximately $30 million from a major aviation component supplier to build fiber coating systems for their new high volume facility. An initial CVC system was previously delivered to this customer in late 2015. It had been anticipated that the June 22 follow up order would be received at an earlier date, but the customer had opted to undergo additional testing before awarding the larger follow-up order. This $30 million order almost doubles the $39 million in revenues that the company generated in calendar 2015.
With this order, the largest single order in the company's history, CVV"s strategy continues on targeting opportunities in the research and development and production equipment market, with a focus on higher-growth applications such as aerospace, medical, solar, smart glass, carbon nanotubes, nanowires, graphene, MEMS and LED's. To expand penetration into these growth markets, CVV has developed a line of proprietary standard products and custom systems. Historically, the company manufactured products on a custom one-at-a-time basis to meet an individual customer's specific research requirement. The new proprietary systems leverage the technological expertise that has been developed through designing these custom systems onto a standardized basic core. Historically, revenues were generated through sales to existing customers. However, with their proprietary solutions and expanded focus on accelerating the commercialization of tomorrow's technologies, CVV has developed a new customer base in addition to growing with their existing customers. [Source: CVV Annual Report for year ended December 31, 2015]
Any small technologically focused company with a very strong founder/CEO at the helm, carries with it, by definition, a number of risks that must be addressed:
- The company may be looked upon as not being as transparent as investors have come to expect. The fact that many of their custom made assignments are from companies and entities that demand anonymity for competitive reasons explains why the company may seem opaque in some of their communications.
- The concentration of orders from one or two customers may not be as much of an issue in the future as the company is broadening out into the standardized products market. However, as of this writing, one or two orders may well represent 50% or more of total annual revenues. The high quality of the company's products may also help to alleviate that risk as well.
- The company's founder and CEO is approaching 70. This fact may be a two edged sword. At the point when the company reaches its $100 million revenue capacity, (one or two orders as received this past June would get them there) that will generate EPS in the $1.50-$2.00 range, the company could become a very attractive candidate for purchase by many larger companies that may be seeking CVV's particular expertise and research capabilities.
- The company, even if it fires on all cylinders going forward, will be subject to the market's love-hate rotation with small technology companies.
The company's balance sheet is strong. As of March 31, 2016, current assets of $$24 million compared to current liabilities of $4.2 million. Total assets of $40.4 million compared to total liabilities of $7.4 million of which $3.2 million was long term debt. Stockholders equity stood at $33 million, or $5.31 per share on its 6.2 million shares outstanding. At its closing price on August 4, 2016 of $8.49, the market cap stands at $52.6 million. With stockholders equity of $33 million, the market is currently valuing the remainder of the company at about $20 million or $3.20 per share.
Serious analysis of CVV's income statement is probably six months down the road. By then, the impact of the June 2016 order as well as, hopefully, additional bookings, will have made a meaningful impact on both revenues and the bottom line. One very interesting point to make on CVV's past income statements is the negligible amount that was spent on R&D which is normally a major expense for technologically focused companies, both large and small. The reason for past low R&D expenditures is that since the company's business consisted almost solely on custom made orders, it was the customers that paid for the research and development of the products that they ordered and CVV was actually paid for R&D. That unique situation may not be as prevalent in the future as the company offers standardized products in addition to its custom made products. However, R&D will continue to be a smaller expense as one would expect from a high tech company. Finally, 20% of the outstanding shares are owned by management, with the CEO accounting for 14%.
The next 6-12 months will be crucial for the future of CVV. If they are able to leverage their largest order in history and move toward their $100 million revenue capacity, they will be able to generate EPS of at least $1.00 within a very short time frame. With its strong balance sheet and its positive outlook for growth, it is difficult to decide whether to categorize CVV as a growth or value opportunity. But I suggest that whatever column one chooses, that it is an opportunity at the current valuation. The market has not yet rewarded the company for the June 2016 order as it awaits further developments given the 2013-14 set-backs. Prior to the 2013 expansion move which have hurt revenues and earnings since, the company stock had achieved its all time high of $18.00 per share. Its recent 52 week high of $13.72 compares to its 52 week low of $6.25 and its current price of $8.49. Downside is limited at this level and the one year upside is to match its previous 12 months high of $13.72. When additional orders are booked and EPS approaches the $1.50-2.00 range, the company's shares will likely surpass its previous high of $18 and move into the low $20s.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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