Summer Solstice Small Cap Investor Conference
June 27, New York City, Westin Grand Central
At Singular Research, we focus on small and micro-cap stocks that are undercovered on Wall Street. We look to find the hidden gems that are often overlooked by analysts and portfolio managers. These stocks have had massive returns over our 14-year history and our performance shows it. We have nearly outperformed the Russell 2000 on a two to one basis since our inception in 2005. Please see below some of our top ideas for 2019 that will be presenting at our research conference in New York City on June, 27.
Luna Innovations (LUNA)
Luna Innovations Inc. develops and markets fiber optic sensing and test and measurement products worldwide. The company has two operating segments. The products and licensing unit sells the company’s commercial fiber optic test and sensing equipment and the technology development segment performs contract R&D for U.S. government agencies.
- Q1:19 revenues were $14.8 million, up 69% versus Q1:18, largely attributable to revenue growth in both the Product and Licensing (+98% YOY) and Technology Development segments (+43% YOY).
- LUNA reported a 79% YOY increase in gross profit to $6.8 million for Q1:19. Gross margin expanded 200 bps YOY to 46% in Q1:19.
- Adjusted EBITDA improved to $1.0 million for Q1:19, compared to a loss of $(0.1) million for Q1:18.
- Net income for Q1:19 was $1.0 million or $0.03 per diluted share versus $0.1 million in Q1:18.
- For the full year of 2019, LUNA expects revenue to be between $60-$65 million, and adjusted EBITDA to be between $6.0-$6.5 million.
- We marginally adjust our estimates based on the results and management commentary. We maintain our BUY rating and increase our target price to $5.50, with an implied capital appreciation potential of 28%.
Emergent BioSolutions (EBS)
Emergent BioSolutions (EBS) is a global specialty life sciences company that develops and commercializes vaccines, drugs and devices that address biodefense threats. The Company is a preferred provider of biodefense products and services to the U.S. government under multi-year contracts. Its most valuable product, BioThrax is the only FDA-approved anthrax vaccine. The Company’s products are sold mainly in the U.S. as well as internationally.
- Product sales rise 102% YOY to $153.0 million due primarily to sales of NARCAN nasal spray and ACAM 2000. Contract manufacturing revenues declined 39% YOY to $15.9 million and contracts and grants revenues increased 36% to $21.7 million.
- In coordination with the US government, EBS is beginning the transition away from BioThrax to next-generation anthrax vaccine AV7909 (formerly NuThrax). The new vaccine has a shorter dosing regimen than BioThrax and a rapid immune response. Because of this transition, the Company expects FY19 revenues and profits this year to be more heavily weighted towards H219.
- EBS anticipates a similar ramp-up for smallpox vaccine ACAM2000 as deliveries are completed under its existing contract. Deliveries under a new contract currently being negotiated are anticipated to commence in H219.
- On the clinical front, EBS posted good interim results from Phase II trials of its chikungunya virus vaccine candidate, which could advance to pivotal trials next year. Patient enrollment for Phase II trials of EBS’ FLU-IGIV therapeutic are wrapping up and trial data from this product candidate could be available later this year.
- EBS ended Q119 with $137.2 million of cash and equivalents. Long-term debt declined to $732.4 million from $784.5 million at year-end 2018. In October of last year, the Company incurred $768 million of debt and used $119 million of cash to acquire PaxVax and Adapt Pharma.
- EBS is guiding for 2019 revenues between $1.06-$1.14 billion, net income ranging from $80-$110 million and adjusted net income between $150-$180 million. We update our FY19 sales and adjusted EPS estimates, introduce of 2020 estimates and reiterate our Buy rating and $70 price target.
Alamo Group (ALG)
The Alamo Group is a global leader in design and manufacture of high-quality agriculture equipment for farms and ranches and infrastructure maintenance equipment for government and industrial markets. The company has 26 manufacturing locations in the U.S., Canada, England, France, Australia, and Brazil.
- Q1:19 revenues were $261.9 million, up 10% YOY, attributable to revenue growth in the Industrial (+19.9% YOY) and European divisions (+6.3% YOY). This growth was partially offset by weakness in the Agriculture segment (-9.3% YOY).
- Q1:19 gross profit increased 5% YOY to $63.3 million. Gross margin was 24.2% for Q1:19, down 90 bps versus 25.3% in Q1:18.
- Net income for Q1:19 was a record $15.3 million, or $1.30 per diluted share, compared to $14.6 million or $1.24 per diluted share in Q1:18.
- Even though the stalled agriculture market and lower farm incomes will continue to dampen sales, margins should continue to improve moving forward.
- Management noted that they are optimistic about 2019 growth prospects. Growing demand in the Industrial Division should continue to drive results in the coming quarters.
- We marginally adjust our estimates based on the results and management commentary. We maintain our BUY rating and our target price of $126.50, with an implied capital appreciation potential of 31%.
Harsco Corporation (HSC)
Harsco Corp is a diversified, multinational provider of industrial services and engineered products. The company's operations consist of two reportable segments: Harsco Metals & Minerals and Harsco Rail. The company has locations in 30 countries, including the United States.
- Q1:19 revenues were $447 million, up 10% from Q1:18, largely attributable to an increase in the Rail (+15% YOY) and Industrial segments (+40% YOY), partially offset by the Metals & Minerals (-1% YOY) segment.
- HSC delivered non-GAAP operating margin of 9.3%, compared to 9.4% in Q4:18 and 9.0% in Q1:18. Adjusted operating income increased ~14% to ~$42 million.
- HSC announced a series of transactions (acquisition of Clean Earth and sale of Air-X-Changers) which accelerate its shift to an environmental solutions-focused company comprised of higher-growth businesses with enhanced margin profiles and reduced cyclicality.
- HSC noted that the backlog trend across segments is positive which should boost revenue in FY19.
- For FY19, HSC raised its guidance with adjusted operating income at $207-$222 million (earlier $200-$220 million) and adjusted EPS at $1.35-$1.53 (earlier $1.29-$1.47).
- We marginally adjust our estimates based on the results and management commentary. We maintain our BUY rating and increase our target price to $32.25, with an implied capital appreciation potential of 29%.
Daktronics Inc. (DAKT)
Daktronics, Inc. is the world’s leading supplier of electronic scoreboards, large electronic display systems, and digital messaging solutions for use in sports, transportation, and communications.
- Q3:19 revenues were $115.0 million, down 11.7% from Q3:18, as a result of weak performances from Live Events (-33.6% YOY) and International (-34.3% YOY), partially offset by solid gains from Commercial (+4.7% YOY), Transportation (+37.5% YOY) and High School & Recreation (+29.1% YOY). DAKT ended the quarter with a $168 million backlog.
- Gross margins declined 30 basis points to 21.6% in Q3:19 from 21.9% in Q3:18 due primarily to higher commodity costs.
- Overall orders rose 7.1% in Q3:19 compared with Q3:18. Orders increased in the Commercial, High School Park and Recreation and Live Events business units and decreased in the Transportation and International business units.
- Loss per share declined to $(0.07) in Q3:19 from $(0.14) in Q3:18.
- DAKT is guiding for flat to slightly lower sales in Q4:19 compared with last year. As a result, we expect modest near-term EPS growth.
- Taking into account recent guidance, we reduce our FY:20 EPS estimate to $0.28, while maintaining our Buy rating and $10 price target. At the recent roughly $8 share price, this implies 12-month capital appreciation potential exceeding 20%.
Acme United Inc. (DAKT)
Acme United Corporation is one of the largest worldwide suppliers of innovative cutting devices, measuring instruments and safety products for the school, home, office and industrial markets. The company has facilities in the U.S., Canada, England, Germany, Hong Kong and China. Acme sells its products in countries. It had 421 employees at the end of 2017.
- Q1:19 revenues were $31.4 million, down 1% from Q1:18, on account of initial shipment to a large distributor in Q1:18 that did not repeat in Q1:19. The performance across regions were mixed with US ( down 1% YOY), Europe (up 6% YOY) and Canada (down 9% YOY).
- ACU is expanding production capacity again at its DMT diamond sharpening plant and plans to launch new Camillus knives offerings in Q3 and Q4:19.
- Gross Margin for Q1:19 was 37.6%, which was down 60 bps compared to 38.2% in Q1:18.
- Operating profit improved 12% YOY on account of cost savings initiatives implemented in late 2018.
- Earnings per share in Q1:19 was $0.24 vs. $0.21 in Q1:18, an increase of ~14% YOY.
- Management reiterated its sales guidance of ~$140-$143 million, net income of $5.0-$5.3 million and earnings per share of $1.41-$1.50.
- We introduce our FY:20 earnings estimate of $1.61 per share factoring in the latest management commentary. We maintain our BUY rating and increase our target price to $23.50, with an implied capital appreciation potential of ~18%.
Waseco Resources (WRI.V)
Waseco Resources’ current lead project is a highly prospective gold property on the prolific Battle Mountain Trend, in Nevada. The Company has also partnered with Areva to explore a series of highly prospective Uranium properties in the Quebec Labrador Trough. Concurrently, the properties are being explored for gold, copper and diamonds.
Management plans to create shareholder value by
- Continuing cost-effective exploration on its prospects
- Continuing efforts to acquire properties of merit that have the potential to host ore bodies
- Working with the local communities to ensure both environmentally responsible and sustainable operations
- Ensuring that all decisions, operations and policies are to the best industry standards and are fully transparent and socially responsible
- Thirty years of exploration without injury
- Trading as a Tier 2 company on the TSX Venture Exchange
- Trading on the Frankfurt Stock Exchange
- $ 2Million of airborne geophysics, ground geochemistry and compilation work completed on the Quebec Labrador Trough Properties since 2005
Comtech Telecommunications (CMTL)
Comtech Telecommunications Corp. designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. Comtech sells products to a diverse customer base in the global commercial and government communications markets. Comtech believes it is a leader in most of the market segments that it serves.
- Net sales for the third quarter of fiscal 2019 were $170.4 million as compared to the $147.9 million achieved during the third quarter of fiscal 2018, representing an increase of $22.5 million, or 15.2%. Net sales for the first nine months of fiscal 2019 were $495.4 million as compared to the $403.2 million achieved during the first nine months of fiscal 2018, representing an increase of $92.2 million, or 22.9%.
- Bookings during the third quarter of fiscal 2019 were $331.2 million, with a company-wide book-to-bill ratio (a measure defined as bookings divided by net sales) of 1.94 with both its Commercial and Government Solutions Segments achieving book-to-bill ratios in excess of 1.00.
- Backlog as of April 30, 2019 reflects a record high of $747.1 million.
- Adjusted EBITDA for the third quarter of fiscal 2019 was $24.0 million. Adjusted EBITDA for the first nine months of fiscal 2019 was $65.2 million as compared to the $47.7 million achieved during the first nine months of fiscal 2018, representing an increase of $17.5 million, or 36.7%.
- Non-GAAP EPS for the third quarter of fiscal 2019 would have been $0.42 which was 23.5% higher than the Non-GAAP EPS of $0.34 for the third quarter of fiscal 2018. Non-GAAP EPS for the first nine months of fiscal 2019 was $1.05 or 208.8% higher than the Non-GAAP EPS of $0.34 for the first nine months of fiscal 2018.
We believe these small cap stocks are mispriced because they are undercovered. They are not well followed in the stock market; therefore, investors do not understand the inner mechanics of the company. Since these companies are small cap, domestic stocks, they have less international exposure and trade war risk than from what most stock market participants perceive. As a result, these stocks have been unfairly sold off and therefore pose great investment opportunities. For more information on these stocks and our investment research, please go to SingularResearch.com where you can sign up for our June offer of a 50% discount on our trial subscription. There, you can also register for our webinar broadcast of these companies that will be presenting on our June 26 investor conference. Thank you for your time in reading this article.
Commentary & Strategy by:
Robert Maltbie, CFA
President - Singular Research
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