Small aerospace and defense name CPI Aerostructures (CVU) took an interesting route to get back into net/net territory recently (trading below net current asset value or NCAV), a place no company would go by choice. Less than three weeks ago, CVU was trading in the mid-$9 range, up just slightly for the year after peaking at $11 in July.
On Friday shares closed at $6.72, down 26% year to date, and the recent fall has nothing to do with earnings. On October 15th, the company proposed a $12 million equity offering, with the proceeds to be used for "general corporate purposes" which the company reported might include working capital, capital expenditures, debt repayment, or strategic acquisitions. Generally, a secondary offering is a great way to depress a company's share price, and on the day of the offering, CVU shares fell nearly 17%. The market simply does not like dilution.
In CVU's case, the public offering ended up pricing 2.76 million shares (including a 360K share over-allotment) at a disappointing $6.25/share. The offering will grow shares outstanding by 31%, a large number for sure. Now, we need to see exactly what CVU will do with the proceeds, and to what extent those actions will counter the dilution.
CVU currently trades at just .78 X tangible book value per share, but that is prior to taking into consideration the new share offering. The fact that the new shares were sold for less than pre-offering tangible book value (TBV) will mean that TBV will fall. CVU also trades at just .86 X NCAV (current assets minus total liabilities), making it the third largest net/net. That calculation will also change, depending on what CVU does with the cash from the stock offering.
Year to date, CVU has been putting up better than expected earnings numbers while beating estimates on revenue last quarter, and missing just slightly the prior two. Consensus estimates for the third quarter, expected to be released on November 8th, are calling for revenue of $21.2 million, and earnings per share of 16 cents. The three analysts currently covering the name now have consensus earnings estimates of 86 cents per share for next year, putting the forward price earnings ratio at less than 8. It is currently unclear however, whether that consensus reflects potential dilution from the secondary offering.
Hopefully, CVU will go into detail about its plans for the cash it recently raised.
I now have holdings in the three largest net/nets, including Richardson Electronics (RELL) and VOXX International (VOXX) , in addition to CVU. "Largest" is indeed a relative term in this case, as the net/net cupboards remain as bare as I've seen them in the many years I've been covering the deep value investment method.
