Thursday, January 28th, 2010
Espey Manufactures Some Solid Numbers
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Espey Manufacturing & Electronics Corp. (AMEX:ESP) may take on some odd jobs, but the real odd thing is that investors haven’t yet discovered the stock’s value. The company maintains a solid balance sheet, generates strong cash flows, and appears well-positioned to profit in 2010 based on its backlogs.
Espey Manufacturing & Electronics Corp. (ESP) develops specialized electronic power supplies, a variety of transformers and other types of iron core components, and electronic system components for a wide variety of end-markets, but primarily takes on odd-jobs.
The company’s primary customers are large industrial manufacturers and defense companies, the U.S. government, foreign governments, and major foreign electronic companies. Notably, the company is automatically solicited from the U.S. Department of Defense for certain projects.
A Look at the Financials
Espey reported a 13.6% increase in sales to $6,874,940 during the first quarter of its fiscal 2010, according to its latest 10-Q filing with the SEC. Meanwhile, the company reported earnings of $992,763 or $0.47 per share compared to $398,296 or $0.19 per share a year ago.
During its first quarter, the company generated $2,111,718 in operating cash flows that trickled down to $820,840 in free cash flow. Assuming an average growth rate of 15.7% and a discount rate of 15%, discounted cash flow analysis pegs the stock’s value at close to $29.56 a piece.
The company also demonstrates a robust 11.4% return on equity and an 11% return on assets, indicating that its management continues to execute efficiently. Combined with a significant asset base and strong balance sheet, these figures present a compelling valuation.
A New Strategy Going Forward
Espey has implemented a new strategy of pursuing long-term, high-quantity military and industrial products and predominately for follow-on production of mature products. Meanwhile, its growing backlog lead it to project fiscal 2010 sales to be higher than fiscal 2009 sales.
The company is also pursuing new opportunities with current and new customers with an overall objective of lowering the concentration of sales. These actions resulted in two customers holding 71.8% of sales in 2008 being reduced to three customers holding 66.8% of sales in 2009.
Finally, the company is also well-positioned to benefit from the economic rebound given that a lot of its orders appear to be add-on orders for large production runs. And if the number of large production runs increases, so does the likelihood of outsourcing manufacturing over-runs.
The Takeaway…
- Espey Manufacturing appears to be a compelling value play with a solid market position in a recovering economy.
- The company has several initiatives on the sideburner that could help boost its results going forward into 2010 and beyond.
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-- Written by Simon Monger
