Park Aerospace: Buying At The Top Hurts

Summary

• Park Aerospace results sank as late shipments spiraled.
• Upside for PKE stock in the near term is limited due to the special dividend that is quite high as compared to their cash flows.
• Long-term, this is a stock that should have a lot of potential.
• Looking for a helping hand in the market? Members of The Aerospace Forum get exclusive ideas and guidance to navigate any climate. Learn More »

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I’ve covered Park Aerospace (NYSE:PKE) various times by now and I would say compared to the market performance, Park Aerospace had an outsized return. While I like the return it has brought investors, at times I found the CEO to be portraying a lack of realism sense in his quarterly earnings calls which I discussed in a separate report. Most prominent is the fact that the company brings up the pressures in the supply chain, inflation and freight costs as well as late shipments to their facilities ad nauseam without presenting a risk mitigation plan or even giving the impression they have one that works. Next to that there was an almost constant complaining about competing parties poaching their employees. The CEO also claimed that employees work hard for the company out of love while it also was quite clear when they don’t meet targets, quarterly bonuses get cut while some people are already have a hard time making ends meet.

In my most recent coverage, I noticed that the tone had become somewhat better but the Q4 2023 earnings showed in some way what happens when a company constantly complains about things instead of working on risk mitigations as I discuss in this report.

The Pains For Park Aerospace In A Constrained Supply Space

Park Aerospace

Park Aerospace has had missed shipments in previous quarters ranging from $0.6 million to $0.8 million, which is a big number for a company that generates between $13 million and $14 million in revenues per quarter. As I noted, I missed the risk mitigation plan on that in the previous quarters and it hit them incredibly hard in Q4 with $1.4 million in missed shipments. You don’t quite see it on the topline, you definitely see it on the bottom line with lower margins. The shipment of raw material came in late, which should have translated into high margin ablative materials for customers in Italy and Japan and specialized international freight is a challenge. I might have missed it before in the huge presentation deck that the company provides each quarter, but we finally saw that the company is building inventory which could reduce some of the risk. It might be late as the missed shipments really went through to the roof in Q4 but that is the risk of the company’s approach really. They could have put more effort into risk mitigation because the supply chain issues are not new. Perhaps you could say that they were a step too late as they prioritized complaining about competitors and the supply chain environment instead of minimizing the risk to the business. It’s not easy, but Park Aerospace could have been more proactive on this.

On topline, we don’t see a huge impact as the $1.4 million was offset by $1.2 million in revenues for Ariane where the company basically has the material at the production side and owns it and it can be turned into a final product on order. That material is labeled as Ariane’s property, and in Q4, Park used that material to produce for Ariane but that is a low-margin shipment while they missed on higher margin shipments so the pain is notable on the bottom line. So, missed shipments and inflationary costs as well as other inefficiencies such as overtime are eating some of the margin away. All in all, it’s very costly to be the weathervane of continuing challenges.

I don’t really have a lot to comment on the first quarter earnings other than the impact we are seeing is something that would happen at some point. Some of the pains are outside of the control Park Aerospace, but what they could control they started trying to sustain it at a very late stage.

For the first quarter of FY2024, the company expects improvement which is the positive here with $14.75 million to $15.25 million in sales with Adjusted EBITDA of $3 million to $3.5 million.

What Will Be The Growth Drivers For Park Aerospace?

I’ve been analyzing stocks for a decade and what I found is that having a clean presentation is key. I covered over 90 companies by now, so you could say I have read hundreds of earnings call transcripts or listened to the actual call and Park Aerospace is the company that takes me hours just to go through the material presented each quarter. At first, I could really appreciate the extensive slide deck, but over time, I noticed it was repetitive and the CEO could spend minutes talking about some items that were of little to no interest to the fundamentals of the business or of interest to investors.

So, each quarter I spend a considerable amount of time listening to the call and going through the slides and really filter the important parts out. Luckily, this quarter the number of slides was significantly shorter. It was still a lot as a clear focus to provide a clean presentation on the results and drivers, the outlook in the near term and the outlook over the longer-term lacks but is getting better.

Park Aerospace

A positive change was the fact that Park detailed its potential on existing programs after throwing “you do the math” at analysts and investors for some time. Just like with their risk mitigation, they were a bit late as I already put a $33 million revenue estimate for the A320neo program in a previous report and the other big programs are also more or less in line with my estimates but it is good that these relevant slides and calculations are provided

Park Aerospace

Park Aerospace also showed that on an unidentified timeframe with growth paths of existing programs, they have $110 million in potential annual sales and $34.8 million in EBITDA. When that will happen is not clear as a significant portion of the revenues are subject to Airbus (OTCPK:EADSF) increasing the rates on the A320neo programs, and from the recent Safran earnings call we know that Airbus has been reducing their near-term purchase orders, but again it is good to have these numbers. It also shows where growth might be a bit soft and I would say that is in the ADL ADRS program, PAC-3 missiles and the Kratos (KTOS) UAV. That is a $20 million add to the revenues and that is soft in my view. The ADL ADRS program aims to reduce drag on the Boeing 737 NG fleet, and with thousands of airplanes in service, I saw this as big revenue driver. Park Aerospace is not quite open on the shipment value for their materials to ADL, but $20 million points at a very low shipment value or low volume. Either way, I had expected a bit more. I had calculated $1 million per kit previously which was likely on the high side but with $20 million in upside for three platforms, the ADL revenue stream is going to be significantly lower than I what I would have hoped for. Long term, the business still has the prospect to double its revenues from existing programs existing new projects and joint ventures so I am not extremely concerned about that.

A Buy Signal At The Top

In my March report, I marked the company a buy as I see growth drivers over the longer term that can result in further stock price appreciation and shareholder returns. Since then, the stock took a 17.5% dive and 16.7% dive with shareholder returns included on a market that gained 5%. Ouch. What happened? A day after I wrote the report, it became clear that Park Aerospace would be removed from the S&P SmallCap 600 and it wrecked the stock price. The company lost 10% of its value, which is most likely solely driven by the removal which took effect on the 20^th of March. I think it is important to realize this was mostly driven by the removal news and not by anything otherwise noteworthy.

Is Park Aerospace A Buy?

Whether Park Aerospace is a buy is hard to say. The company has little coverage from analysts and even Seeking Alpha’s Quant rating hasn’t any ratings available. Using the tool that I will soon launch for subscribers of The Aerospace Forum, I have computed 28% upside using a valuation in line with the industry enterprise multiples with further upside in the years to come. It should also be noted that the company has no debt and extremely little lease obligations while its cash and marketable securities stand at $105 million. So, significant upside one would say. However, there is one thing that significantly reduces the near term attractiveness and that is, as odd as it may sound, the $1 special dividend which reduces the upside to less than 5% for this year.

I won’t rule out that if signs are there that the supply chain issues are dissolving and the market is in a positive spirit, that we will see significantly higher stock prices, but overall the $1 in dividend per share hasn’t done much for the upside to the stock price but that is also how shareholder returns work. I am maintaining my buy rating but that is really only driven by the upside I see in the years ahead.

The Risks For Park Aerospace

Airbus

I also think that investors should be mindful about the risks. It is nice that we have some impression on where revenues could go, but the reality is that the timeline is unknown and while in the past the CEO made his company sound special when it committed to supporting the rake hikes that Airbus plans while others did not, the reality is that the suppliers to Park Aerospace couldn’t support and even Park Aerospace is short staffed. So, you can commit, but if you don’t have the resources, you can question what has Park really committed to or better said, how are they going to back up that commitment? While the CEO portrays this as a “We at Park Aerospace” thing where they go above and beyond to make things happen, the reality is if tomorrow the supply chain issues dissolve and Airbus produces enough jets to provide Park Aerospace with a lot of LEAP work, it is highly likely that the already stretched workforce of Park Aerospace will not be able to handle it.

Conclusion: Near-Term Attractiveness Fades For Park Aerospace Stock

Looking at the results, it wasn’t a good quarter for Park Aerospace. In some way, their late action on risk assessment and mitigation played a part in this view, or the CEO is not accurately describing its mitigation steps and this makes their risk handling sound way worse than it is. The environment remains highly challenging for Park Aerospace and we have seen how that affects results. Moreover, the $1 per share special dividend is nice for investors but it doesn’t do a lot of good things for the upside to the stock. It is really taking the upside out of the stock and giving it to shareholders to deploy as they please. That, however, doesn’t discount the fact that the long-term remains a good one for Park Aerospace and you can see these $1 per share special dividends as the compensation you get for waiting for things to ease in the aerospace supply chain which will unlock significant upside for Park Aerospace.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of EADSF either through stock ownership, options, or other derivatives. 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.

Comments

[PatrickM1]

I expect to see Shore step away from CEO role within a year. Would not be surprised at all to see dividend eliminated and certainly no more specials.

[Aglyme]

I am a very bad stock picker. But I understand what it takes to run an aero parts company. Presently, it is a good time to build commercial Parts. Order books are full. The trend however is going to be either rough or fabulous for Aero Parts makers in a couple of years, possibly sooner.
Post Covid’s order destruction and malaise in the materials and labor markets threw the Supply Chain into chaos. Delivery metrics sank.
OEMs (both Airframe and Engine) went from Supplier Rationalization mode to a “get parts at any cost” one.
The PE owned suppliers naturally raised prices while the OEMs were on the ropes for Parts and cash.
It stands to reason that the current dynamic will change soon. The healthy PE-owned Parts makers will soon embark on the Great Rollup 2.0 with the goal of collecting “content”… building (controlling) more higher assemblies, etc. They will get super competitive on Parts pricing with the OEMs who seek both pricing and cash flow (extended payment terms) relief.
The Rollup winners will then go public and the patient early investors will finally reap a reward.
The OEMs will achieve cost savings and ultimately a smaller Supply Chain. Once the OEMs achieve a smaller Supplier population they will live their long term dream of shrinking their massive Army of purchasing heads.
When I review these publicly traded (or PE owned) suppliers I ask myself:
1) are they going to be a leader in the Great Rollup 2.0?
2) are they going to get purchased by the bigger firms buying the smaller firms that build strategic content with A+ processes ?
3) are they going get creamed over time because their pricing is too high and processes too fat.
2025 will be an interesting acquisition year esp if interest rates decrease. There will be lots of Supplier fallout and happier OEMs.