Yesterday's "bloodbath" sure gave the talking heads something to crow about. That was the first drop in excess of 1% in the S&P 500 this year and also the first since Oct. 11, by my count. While that in itself is fairly remarkable -- a five-month gap between 1% down days -- judging by some of the news reports I saw yesterday, you would have believed that the sky was falling. Maybe it is, I don't know, but the reaction to a mildly negative day was over the top. I shudder to think how they'll react when we get some volatility back in the markets.
Still, the search for deep value continues, and it has borne some fruit in the identification of a new net/net (company trading below net current asset value) -- a true rarity these days. Aircraft parts manufacturer CPI Aerostructures (CVU) has had the stuffing beaten out of it recently. Since hitting the $10 level in late December, shares have taken a 33% haircut.
Fourth quarter results, released earlier this month, were slightly below expectations. Earnings per share ($0.24) missed by a penny, while revenue ($24.3 million) was off by $1 million. The consensus here is rather small, however, with just three analysts covering the company. Full-year revenue for 2016, at $81.3 million, was down 19% from the prior year -- not unexpected. Any time you get involved with companies that generate the bulk -- 77% in this case -- from the defense business, buckle up for a wild ride. Both revenue and earnings can be lumpy.
CPI ended the year with a total backlog of $416 million, $254 million of which is from several defense contracts awarded since November 2014. The F-16 Falcon, T-38C Talon Trainer, E-2D Advanced Hawkeye, and Raytheon Next Generation Jammer Pod represent the bulk of that backlog. Company guidance for 2017 suggests revenue in the $82.5-$87 million range and pretax income between $8.1 million and $8.5 million, and implies earnings per share in the $0.58- $0.61 range. Consensus analyst estimates for 2018 are calling for EPS of $0.87, putting the forward price earnings ratio at just 7.5x.
Currently trading at 0.95x net current asset value, CPI also trades for just 0.83x tangible book value per share. CPI's balance sheet is light on cash, but it always has been. Total debt stood at about $33 million at year end.
Net/nets these days are becoming exceedingly rare; profitable net/nets even more so. Granted, CPI is undoubtedly at the whim of defense spending, and sequestration was a headwind. If the 2018 defense budget is increased, as is anticipated, this could bode well for the company, but details remain to be seen.
