Taylor Devices: Pristine Balance Sheet And Growth Potential Remain In Place (Rating Downgrade)

Summary

• TAYD is a well-established company with a high level of expertise in the shock and vibration control field.
• TAYD has maintained a pristine balance sheet, so it can afford to grow organically and/or through acquisitions.
• TAYD's stock has outperformed all the major indices since my BUY recommendation.
• Looking for a portfolio of ideas like this one? Members of Value Investor's Stock Club get exclusive access to our subscriber-only portfolios. Learn More »

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Some investors never buy small-cap stocks while others never buy stocks that are below $5 per share. But the stock price does not mean anything to me, because numerous large-cap stocks have crashed and/or have filed for bankruptcy over the last decades. As such, I'm always saying that investors need to debunk these myths and think outside the box. Instead, they need to check under the hood and focus on the fundamentals, if they want to make money in the stock market.

In other words, I always advise Seeking Alpha's readers including the subscribers to my research to move off the beaten path and invest in select undiscovered small-cap stocks that meet specific and strict investment criteria, if they look for outperformers. This is why I recommended Taylor Devices (NASDAQ:TAYD) in October 2021.

Specifically, it was back in October 2021, when I wrote an article and advised investors to buy TAYD at $11.80 per share. TAYD currently stands at about $14 per share. Therefore, since my BUY recommendation, TAYD has outperformed all the major indices (S&P 500, Dow Jones, Nasdaq, Russell 2000) and the vast majority of the stocks including numerous growth stocks and numerous large-cap stocks that have collapsed since October 2021.

However, the Seeking Alpha authors keep ignoring it and have not written any article about it over the last years. This is why I decided to write an update about this undiscovered company.

The Strong Fundamentals Remain In Place

TAYD recorded strong revenue YoY growth and net income YoY growth in FY 2022 compared to the prior-year period, and continued on the same path in the first half of FY 2023. Specifically, in H1 FY 2023, the company announced a 30% increase in net revenues and a 204% increase in net income compared to H1 FY 2022, with revenue for the first half of fiscal 2023 being higher than any half fiscal year period in the history of the company.

Gross profit margin was 38% in H1 FY 2023, which is eight percentage points greater than in H1 FY 2022 (30%) and twenty four percentage points greater than in FY 2021 (14%), while its sales backlog in November 2022 has increased about 7% on a YoY basis, as quoted below:

At November 30, 2021, the Company had 139 open sales orders in our backlog with a total sales value of $17.0 million. At November 30, 2022, the Company has 139 open sales orders in our backlog, and the total sales value is $18.1 million."

And the good news does not end here. The sales backlog in December 2022 is approximately $30 million, significantly up from $18 million in November 2022, as quoted below:

The company's firm order backlog was $18,100,000 at the end of the 1st six months of this fiscal year as compared to $17,000,000 at the end of the 1st six months last fiscal year. While too late to be included in the backlog as of November 30, 2022, the Company recorded an additional $12 million of sales order bookings in the month of December. "

That said, let's take a deeper look at its revenue. TAYD has three general groups of customers (industrial, structural, aerospace/defense) and most of its revenue keep coming from the structural segment, as illustrated below:

		Six months ended November 30
		2022				2021
Industrial			11	%			8	%
Structural			54	%			62	%
Aerospace / Defense			35	%			30	%

Click to enlarge

Additionally, most of the revenues are coming from the U.S., as illustrated below:

				Six months ended November 30
				2022				2021
	USA				80	%			73	%
	Asia				13	%			18	%
	Other				7	%			9	%

Click to enlarge

When it comes to customer concentration, TAYD is not dependent on any one or a few major customers, as quoted below:

The Company is not dependent on any one or a few major customers. Sales to four customers approximated 37% (15%, 8%, 8%, and 5%, respectively) of net sales for 2022."

I believe that a key reason why TAYD does not have high customer concentration is that the competition is not very tight especially in the U.S., as quoted below:

The Company faces competition on mature aerospace and defense programs which may use more conventional products manufactured under less stringent government specifications. Two foreign companies and two U.S. companies are the Company's main competitors in the production of crane buffers. The Company competes directly against two other firms supplying structural damping devices for use in the United States. For structural applications outside of the USA, the Company competes directly with several other firms particularly in Japan, China and Taiwan. The Company competes with numerous other firms that supply alternative seismic protection technologies."

Last but not least, unlike many other firms with pandemic-related supply chain issues, TAYD is not dependent on any one or a few major suppliers for the principal raw materials used in the manufacture of its products, as quoted below:

The principal raw materials and supplies used by the Company in the manufacture of its products are provided by numerous U.S. and foreign suppliers. The loss of any one of these would not materially affect the Company's operations."

Low CapEx Business Model

TAYD has a low CapEx business model, which is a key starting point when it comes to free cash flow generation. Specifically, CapEx for FY 2019 were just $473,000 compared to $937,000 for FY 2018, while CapEx for FY 2020 were $1.2 million compared to $1.6 million for FY 2021.

Additionally, CapEx for the six months ended November 30, 2022 were $1,391,000 compared to $560,000 in the same period of the prior year, while the annual CapEx will remain below $2 million, as quoted below:

As of November 30, 2022, the Company has commitments for capital expenditures totaling $1,800,000 during the next twelve months."

One of the factors behind this low CapEx business model is:

Occasionally, research and development for products in the aerospace and defense sectors is funded by customers or the federal government. The Company also engages in research testing of its products."

Growth Initiatives And Recent Projects

TAYD has taken several growth initiatives over the last twelve months in order to offset the negative impact of COVID-19 on its operations.

First, it partnered with Thornton Tomasetti to manufacture and distribute the Pumpkin Mounts absorber. This absorber offers significantly improved performance over standard devices, provide enhanced load capacity that can withstand repeated shock, along with reduced high-frequency noise and efficient use of space. Unlike rubber mounts, which require secondary devices to avoid tearing and failure, Pumpkin Mounts are resistant to high-tension forces. And for those who don't know Thornton Tomasetti, it's a global, 1,500-plus person scientific and engineering consulting firm that was founded in 1949.

Second, it introduced the Taylor Damped Moment Frame™ a few months ago after working on this exciting project for the last couple of years. This project aids engineers in utilizing technology that will result in buildings that are more resilient during seismic events, as quoted below:

The TDMF™ simplified design procedure for an alternative is a lateral system using Steel Special Moment Frames with supplemental damping, supplied by Taylor Devices’ Fluid Viscous Dampers. The procedure for the TDMF™ was developed and validated through ICC-ES using the rigorous AC494 process which utilizes collapse analysis per the FEMA P-695 methodology.

This new design procedure is rooted in Modal Response Spectrum Analysis alone, removing the need to conduct Nonlinear Time History Analysis to design new steel buildings with dampers. In addition to removing the requirements for peer review of damper project, the TDMF™ procedure opens the door for engineers who may not be familiar with NLTHA and damper design, broadening access to achieve better building performance and cost savings."

Third, TAYD signed in September 2022 an agreement with Constec Engi, Co. to become its representative in Japan.

That said, one of the company's recent and most emblematic projects is its participation in NASA's Artemis 1 program. Specifically, TAYD was able to watch the successful launch and mission of Artemis 1 with its products near the top of the rocket and on the launch pad. For this mission, Taylor Devices supplied a series of 6 highly specialized isolators for the mission that are installed between the Launch Abort Rocket Ogive (fairing) and the Orion Crew Capsule right near the top of the SLS Rocket. TAYD will be supplying these isolators for each subsequent Artemis mission. Additionally, Taylor Devices supplied many different reusable energy absorbers that are installed on the launch gantry and will remain there for future missions. The next mission, Artemis II, is scheduled to occur in approximately two years, this time with astronauts aboard the Orion spacecraft and will travel further into the solar system than humanity has ever traveled, paving the way for humans to return to the surface of the moon during the Artemis III mission. As its products date back to the Apollo Program, it has been a supplier to NASA for many years.

Moreover, TAYD recently expanded into New Zealand. Specifically, TAYD's Fluid Viscous Dampers were recently used for the first time in New Zealand's capital. The Bowen Campus in Wellington consists of two earthquake-resilient buildings, being built at a cost of $160 million.

Last but not least, 2022 was a busy travel year for TAYD. As illustrated below, the company improved its marketing strategy by attending many conferences across the U.S. in an effort to speak directly to engineers and customers about its products and projects it's working on:

The company's website

On that front, TAYD recently attended the International WorkBoat Show in New Orleans for the first time. This is the largest show in the commercial and military marine industry that attracts 10,000 members of the commercial marine industry.

Valuation

As of Q2 FY 2023, TAYD is debt-free with $22.1 million in cash & cash equivalents & short-term investments, so its Enterprise Value is about $35 million at the current price of about $14 per share.

Based on the sales backlog as of Q2 FY 2023 and the recent corporate developments, I project that adj. EBITDA and revenue in FY 2023 will be about $6.4 million and $40 million, respectively.

As a result, I project that at the current price of about $14 per share, EV-to-FY 2023 adj. EBITDA and EV-to-FY 2023 Revenue are about 5.5 times and 0.9 times, respectively. None of these key metrics is high, given also that TAYD is a consistently profitable company with a pristine balance sheet and growth potential.

Risks

I believe that these are the key risks associated with TAYD's stock:

1) Microcap stock with low free float: TAYD is a microcap stock with low free float given that insider ownership coupled with the principal shareholders is high at approximately 30%, as shown in the previous paragraph. As a result, trading volume is low that usually translates into high volatility and therefore, TAYD is not for day traders, momentum traders or short-term traders. Instead, the potential buyers need to have a 12-month investment horizon (at least).

2) Competition: TAYD was incorporated in 1955, so it's a well-established name in the design, development, manufacture and marketing of shock absorption, rate control, and energy storage devices for use in various types of machinery, equipment and structures. Although the competition especially in the U.S. is not very tight to-date, TAYD is a small company with a limited amount of cash, so a larger company could have more financial resources required for infrastructure, machinery, R&D and advertising, which could help it increase its market share in the next years.

Takeaway

Numerous large-cap stocks and numerous growth stocks have collapsed over the last 12 months, so millions of investors have lost billions. And I strongly believe that many of these names will continue to underperform and will not recover in the foreseeable future primarily due to their weak fundamentals.

Amid this bloodbath, there are many undiscovered stocks in the small-cap space that meet specific strict investment criteria and offer significant returns to those who are not day-traders, short-term traders or momentum traders. TAYD is one of them and has risen since my BUY recommendation in October 2021.

I also project that, barring unforeseen events, TAYD has further upside potential from its current price, based on a 5-year investment horizon. On top of this, I believe that a buyout from a big player is not out of the question.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.