Hello,
As subscribers already know, I am sucker for simple tangible product businesses that are inflecting. And I think after following this one for a long time, I think now is a good time to be invested. There are reasons for why I think that.
It is a classic setup of operating leverage in its early innings. After years of cost inputs pressuring the gross margin of the company, the management is actively rising prices for their products, which are mission critical and according to my research does not have a substitute in the US. Furthermore, programs—which this company supplies to—are at significant inflection point and will likely grow for many years. Despite the fact that this is still before the stated ramp-up, the company has already a record backlog, which in given fiscal year resulted on average the sales being 188.5% higher the year after. If that happens also this year, the sales will grow 80% YoY.
On the higher revenue base and improved margins I project we likely pay roughly 7.7x EV/EBIT for this year’s ending run-rate of revenue and earnings. Yet, I believe, this is still before major ramp-up of production at the defense primes and it trades at significant discount to other companies benefitting from this trend.
It is exactly what I am looking for in the growth company—significant revenue growth, margin expansion and reasonable valuation. All that in a very small, yet significantly important end market, where competition is limited. In fact, management states they have only one real competitor.
With that I am sharing my report on this company I acquired position in and consider it actionable idea that should rather develop quickly with a multi-year tail.