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Saturday, June 25, 2011

Re-evaluating CPI Aerostructures (CVU)

CVU (sec)

I've followed CVU for about 7 years and I've owned it about that long.  As I've written before, I think my initial purchase was a mistake, but that it's been worth owning after the first two years.

Let's look at recent disclosures.

Amended credit agreement with Soverign Bank, May 11, 2011.  5th agreement, increasing revolver from $4 million to $10 million.  No longer a min rate of 3.75%.

Conference call on May 4, 2011 (with transcript).
We are [a] prime contractor to the U.S. Department of Defense and during the last few years we have substantially grown our business to become a subcontractor to some of the largest U.S. aerospace and defense contractors such as Northrop Grumman, Boeing, Sikorsky, Spirit AeroSystems, Lockheed Martin and Bell Helicopter.
and also this
We have carved out for ourselves a niche within the aerospace market and have become one of the country’s leading suppliers of structural spares of vintage and out-of-production aircraft and, now, assemblies for new production planes.
Financial statement details:

Revenues increased 45%.  Gross margins dropped to 24% (from 25%).  Net income increased to 19 cents per diluted share.  However, this has varied a lot over the years.  I've waited a long time for the anticipated big growth in revenues.

The award growth is driven in part by expected follow-on releases of E-2D and G650 programs.  They claim there is also "real business potential" from the approx $0.5 billion of un-awarded solicitations outstanding once the programs are funde and/or awarded.

They talk about the increasing relationships with additional prime mfgers (helicopter, private jet).

They're projecting 2011 revenue of $78 to $81 million and net income in the $9.2 million to $9.5 million range.  2012 should be in the range of $88 to $91 million revenue and $11 to $12 million net income.  They've been pretty accurate with their predictions in the past.  Let's take the worst case prediction of 2012 and figure out diluted earnings per share.  Let's assume 8 million totally diluted shares.  Give it a P/E of 15 and you end up with a stock price of $20.  That might be a bit high to assume, given the business they're in, and it's 1.5 years into the future, so maybe give it a present value of $18, assuming their predictions are accurate.  That represents a 37% gain going forward.  Is that sufficient to hold onto it right now?

If the nature of the business is that they must hunt down every scrap of revenue without any follow-on or established reputation, then it would be good to assume a lower P/E.  There's a good argument that this isn't the case for them and I've been viewing them as establishing a solid reputation to secure repeat business easily (at least far easier than someone new).  I think that's really the key to the investment thesis for CVU.

Let's continue with the conference call, ですね?

The company had a share offering of 500K shares in April 2010.  They only got $7.80 per share.
As a result, we strengthened our financial position in preparation for continued growth and enhanced the potential liquidity of our stock.”
The point about liquidity is pure BS.  They needed the cash and diluted the stock.

When you figure the value is only perhaps 37% higher than the current price, the uncertainty, the long time it has taken so far to get not-very-far, the share placement, etc.  Maybe it's worth looking for another investment, but I'll continue to see if I change my mind.

New orders were $46.8 million vs $8.1 million last year.  The large amount this year is due to the expected follow-thru from two big subcontracting programs (E-2D, G650).  However, he says G650 was only for $8 million.

He claims their reputation has been elevated in the industry.  They trying to establish relationships with other primes, including other helecopter and private jet companies.

They expect the margins to bounce back to the projected level by end of year.

Right Said Fred said that back in the old days (2005ish), they would bid on everything and end up with like 300 contracts, but now they're a lot more selective with around 80.
Also, as I’ve stated a gazillion times, a lot of those government contracts have dried off for the time being, at some point they will come back, but we will approach it the same way. Given the size of our company now, we will absolutely be more selective. That said, I think the difference in what we bid on today versus what we used to bid on is that because of our standing now in the aerospace industry, we are getting the opportunity to bid on things that are routinely more than $10 million and are not – is not, I’ll call a contract but more a program; meaning, in the old days, we had a contract to build 28 of this part number, period, end of story.
This is interesting, both points.  My big question here is how the business will change going forward.  Will it grow like they say or just continue to spin at the same level?
Difference is we’re now getting ourselves involved in programs versus contracts which is a much, much better thing for us. It’s what given us that visibility over these years to be able to project out three years on revenue and net income. And as we’ve been successful with one set of customers, it’s opened the door to a whole new set of potential customers, people who have actually searched us out now.
In the old days, sales had to go on the road constantly chasing down business.  Now they do RFQs

The half-billion-dollar pipeline has about 30% new customers in it.

Ed Fred said something interesting.  They got a small order will Bell Helicopter in Q1.  It's not a prototype, but it gives them a chance to show what they've got.  Bell came to them (usually companies their size, they have to chase people like Bell) and invited them to their chalet in Paris.  There's very little business in the pipeline from Bell, so any business they get will add to the number.

In terms of the traditional gov business, they haven't seen a thing since 2005...
Quite honestly. I mean, it’s just – it’s not there. Yet. It’s not that we are not winning it, it’s not that we’re not bidding on it, it’s not even being put out for bid. The money is not there and obviously in a shrinking defense budget
Before it went away we were the number two supplier of all cargo structure behind only Lockheed Martin. It was generating $30 million a year for us. In my projections I don’t include a blessed thing. So that if at some point this does come back, you know, we are looking to regain some of that market. But as of right now, the only thing we’ve seen is a little bit of C-5 work
This is interesting.  The main thesis for investing in the stock was the C-5 work plus the normal ongoing gov work.  Here we are, 6 years later and it's still stuck in the pipeline.  Just minor dribs and drabs.  The planes need the work, what's going on?  Are they doing it in Iraq and Afghanistan?

If this stuff frees up, I'd expect something like 40 or more million in revenue per year added to the top line.  That would nearly double their revenue and do wonders for the bottom line.  That's the jackpot here.


Looking at the 10-Q for Mar 31, 2011.
Net PP&E increased by $300K
Contracts in the current assets increased to $55 million from $47 million.
Otherwise, it's about what I expected.
Earned 20 cents per diluted share.

Cash flow is bad due to new orders.  I worry about inflation with this company, given the cash flow nature of it (expenses up-front, operating cash flow comes in later).

They're highly dependent on a few key customers.

I need to put some more thought into CVU.  It's really a question of whether the gov business will return.  It's been far longer than I expected.  In the meantime, CVU has done a fabulous job of securing new business in the commercial sector which, I believe, proves their point about them having respect in the industry (or at least provides a strong indication of that),

Over the years, I've seen that good management makes a big difference, but the thing is that even good management can't rescue a bad business model.  The gov business turned out to be a bad business model (at least for now) and CVU can't do anything about it.  But they've opened up a new area that not only keeps them going, but actually provides reasonable earnings.

Again, the question is: will the government business return?  From what I can tell, the only reasons it wouldn't return is either 1) the gov shrinks the military significantly, 2) the business goes to someone entirely different.  And even if the military shrinks a lot, a good portion of the work would still remain.

I'm still trying to make a decision.

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