Sunday, November 18, 2012

A Restructuring Story For Small Cap Investors

  This article is a summary of what I read in Barron's . I thought this idea was interesting to point to readers looking at small cap names. The valuation, unlike my other articles, is not mine.
  • Sparton Corporation (SPA) - Currently trades at $12.05
  • Potential Upside by Industry Estimates: Approx. $8 per share
  • Market Capitalization: $123m
  • Cash: $43M; Total debt: $1.64B
  • Shares Outstanding: Approximately 7M
  • Revenue: $21.7M; EPS 2013/2014 Est.: $1.30/ $ 1.70
  • Sector: Technology; Industry: Divesrifised Electronics
  • Main Catalyst:   Navy contract, Fundamentals, Accretive acquisition,

      What does SPA?
      Founded in 1900 and based in Schaumburg, Ill., Sparton has a rich history as a manufacturer. At one point it was an automotive supplier, and is credited with inventing the car horn. Today the company operates in three segments—medical devices, defense, and electronics manufacturing, which it dubs "complex systems." Medical manufacturing accounts for 50% of sales.

Sparton, a small manufacturer of electromechanical devices, is well on its way to reinventing itself after a period of operating losses and a near-death experience in 2008-09. The turnaround has been piloted from the start by a new management team, led by CEO Carey Wood, who slashed costs and terminated unprofitable contracts. Management also has shifted its focus since 2009 from low-margin contract manufacturing, such as circuit-board assembly, to specialized manufacturing in highly regulated markets such as military aerospace and medical devices, which carries higher profit margins.
The results have been impressive. In fiscal 2012, ended June 30, gross margins widened to 17.2% from 7.1% at the trough in fiscal 2009. Sales climbed 10% from fiscal 2011 to $224 million, with earnings up 27%, to $9.5 million, or 92 cents a share. Applying a multiple of 12 times earnings to 2014 estimate,  the stock could be worth $20.

Potential Catalysts:

US Navy:

The U.S. Navy is Sparton's biggest customer for underwater sonobuoys. Investors were quick to spot the improvement; Sparton's shares (SPA) have rallied more than 700%, to $12.05, from $1 and change in 2009. But the stock remains underappreciated at 13.5 times trailing 12-month earnings of 89 cents a share, and more gains are likely.Management is targeting $500 million in revenue by 2015, driven by acquisitions. The shares could rise 50% or more in the next 18 months. In the defense segment, Sparton builds sonobuoys, underwater listening and locating devices designed to detect the presence of submarines. They are positioned in the water ahead of every carrier fleet to alert them to the presence of enemy submarines. A sonobuoy survives for about eight hours before it self-destructs. Sparton is the only U.S. manufacturer of sonobuoys, and one of two worldwide. The U.S. Navy is its primary customer.

Shifting Strategy:
Sparton works on contract in the other two divisions, serving as the manufacturing arm for original-equipment makers. In the medical segment, it makes therapeutic and in vitro diagnostic devices for customers such as Siemens (SI), Fenwal, and NuVasive (NUVA). In complex systems, Sparton builds circuit-card assemblies as well as complete electronic systems for aerospace customers such as Goodrich and Raytheon (RTN).
Management is keen to shift the revenue mix to higher-margin activities. The defense business has the highest gross margins, at 23.6%; medical margins are 13.7%, and for complex systems, 10.7%.To boost margins, Sparton has explored new growth initiatives. For example, it is planning to bundle the directional and listening technologies used in sonobuoys and market them for use in other unmanned defense systems, a growing market. Sonobuoy sales also could see growth as the Navy moves in 2014 to deploy the devices via jets instead of prop aircraft. According to a fiscal 2011 budget estimate from the Navy, spending will increase 60% year over year in fiscal 2014, to $160 million, primarily due to the transition.
SPA’S other plans include gaining market share in niche medical devices via acquisitions, and continuing to migrate to higher-margin work in complex systems. In the September quarter, revenue fell 5% from the year-earlier period, and net income fell to $1 million from $1.5 million. The decline is temporary, and related to a delay in sonobuoy deliveries. Management is optimistic for the remainder of the fiscal year.

M&A and Fundamentals:
As of Sept. 30, Sparton had $43.1 million in cash to $1.6 million in debt. It generated $22 million in free cash in fiscal 2012. On 6-Nov-12, Sparton agreed to buy Onyx EMS, a medical-device manufacturer, for $43.3 million. The deal, expected to close at the end of the month, is a major one for Sparton, bringing in $50 million in annual revenue. While management currently is restricted from disclosing how accretive the purchase will be, it has said that Onyx has gross margins of 18%, higher than Sparton's own medical division. The deal will be financed with cash and borrowing under a credit facility.  Some in the industry estimate that the deal could add 50 cents a share in annual earnings, bringing his fiscal 2013 earnings estimate up to $1.30 a share, and his fiscal 2014 estimate to $1.70 a share. Applying a multiple of 12 times earnings to his 2014 estimate,  the stock could be worth $20.

Wednesday, November 14, 2012

Long Gentex Industries (GNTX): Positive Catalysts Outnumber Negative Ones

I have posted an article on Seeking alpha which goes into details about how to profit from going long Gentex Industries (GNTX). It’s for medium to long term investors. 
If anyone reading do invest in special situations, this might make a good read. Either you can click here or go to Seeking Alpha and  and check out "kedar special situations" Its under long ideas for Gentex (GNTX).

Thank you