Defense Firm CPI Aerostructures' Stock Price Goes on the Offensive

 | May 12, 2017 | 11:00 AM EDT
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It has been a solid week for now former net/net CPI Aerostructures (CVU) , which has left net/net land, a strange place that no company would ever go by choice, due to a nearly 40% jump since reporting better-than-expected earnings on Tuesday. Companies typically depart net/net land for one of two reasons -- through the elevation of their stock price or the degradation of their balance sheet, either of which can lift valuations above 1x net current asset value (current assets less current liabilities), which is my definition of a net/net.

Obviously, a rising stock price is preferred. When buying a net/net, which can represent an extremely cheap valuation or a company that has seen its best days and is a value trap, the hope is that something will trigger some investor interest in the name in order to drive the stock price higher. This trigger often involves an improvement in operating performance and/or, at the very least, realization that the stock has been overly punished. This can be a slow process -- that is, if it actually plays out in your favor.

In the case of CPI Aerostructures, the first quarter delivered positive surprises in both revenue ($20 million versus the $16.8 million consensus) and earnings (14 cents versus a six-cent consensus). With just three analysts covering the company, the consensus is rather small, raising the likelihood of a surprise, and this one was fairly substantial. That's par for the course with net/nets; there is often little or no analyst coverage.

Despite this week's jump, the stock still trades at just 1.09x net current asset value and 1.01x tangible book value per share. Consensus estimates are calling for earnings per share of 87 cents for 2018, putting the forward price/earnings ratio at just 9.

With the company dependent of defense spending -- 78% of the current backlog of $400.8 million is comprised of multi-year defense contracts and 94% of its bid pipeline is defense-related -- potential increases in defense spending may bode well. The signing of the 2017 Omnibus Appropriations Act, which only funds the Defense Department through September, has management seemingly hopeful for future defense spending. That, of course, is a double-edged sword. Dependence on politically influenced spending can be tenuous at best.

Still, this one was too cheap to ignore. Now a double-net (trading between 1x and 2x net current asset value), it's one that I'll continue to hold.

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