Even in this horrid market, it's held its ground the past 6 months - flattish
From a technical perspective is has pulled back nicely today and yesterday afternoon from $72s to $62s (50 day moving average) so it's tempting to get involved today. I'd like to see what casino hour (3 PM) brings to the market first, and a purchase near the 200 day moving average would be even more appealing ($56s). But as we view the next 18 months or so we need to focus on businesses that are sheltered... that doesn't mean they will provide the most return - trust me at some point these commodity stocks will put on 80% moves in 2 weeks (but from what depressed level?) and housing stocks can double in a week in this environment on "hope". But those are trades at this point. We're looking under every last rock for a few things we can actually invest in (and trade around a core position) and hold without fear for more than 48 hours. This is the type of name we'd put into that category.
Axsys deals in 2 main product lines - imaging (70% of sales YTD) and surveillance (30% of sales YTD) - both produce lines growing in the 40% year over year range. Website here. Product overview here. Customer list here: Army, Navy, Air Force, Coast Guard, Border Patrol, Homeland Security (never a cutback in these areas) - along with many private defense oriented companies.
For over 40 years, Axsys has been designing and delivering accurate and reliable optical and motion control solutions to the US government and to high performance commercial markets. Axsys engineers are applying this experience to create increasingly sophisticated, vertically integrated systems that combine optics and motion. These systems are enabling a growing range of demanding optical applications such as thermal weapons systems, nighttime surveillance cameras, and highly precise medical imagers.
They actually play on the same "pilotless drone" theme as AVAV for part of their business. Here is some data from their latest earnings report in late October (what recession? We have the US government's unending pockets as our friend) Sales up 43%, gross margin improved from 32.4% to 34.9%, operating margin up from 13.5% to 18.2%, net income up 118%; earnings up 107%; new record backlog. What is "great" about the U.S. government is it seems to be such a nice customer - almost every company I look at that has the US government as its main customer is expanding margins very nicely - it appears price is "little object" when the US government is the customer. Shocking...
- During the third quarter of 2008, Axsys generated sales of $64.8 million, compared to $45.2 million in the third quarter of 2007. Net income was $8.0 million or $0.69 per diluted share, up from $4.1 million or $0.37 per diluted share in the third quarter of 2007. Our results for the third quarter of 2008 were favorably impacted by a below average tax rate of 31.6%.
- Sales growth in the third quarter of 2008 was mainly driven by continued strong demand for infrared cameras and lenses.
- Our Nashua facility also made a concentrated effort to increase shipments during the third quarter in order to mitigate the anticipated disruption associated with the Surveillance Systems Group's move to a second Nashua facility in the fourth quarter. The growth in sales resulted in improved leverage in both business segments.
- The Imaging Systems Group's margins were also positively impacted by a favorable product mix during the quarter. Backlog growth was mainly attributable to strong demand for thermal camera systems.
- Compared to the same period in the prior year, the Surveillance Systems Group increased sales by 39%. This segment's growth was due to continued strong demand for a variety of camera systems, particularly for use in land-based perimeter security and border protection applications.
- The Imaging Systems Group's sales grew 45% year over year. Increased throughput in our motion control and infrared lens businesses drove the growth in this segment.
- Backlog increased to $184.5M
- Sales $242-$244M, up from $237-$241M
- EPS $2.28-$2.30, up from $2.09 to $2.15
- Sales $278-$282M
- EPS $2.66-$2.72
``In these uncertain economic times, we are fortunate that our products are largely sold into markets that are not directly affected by the general economy,'' continued Mr. Bershad.
Investor's Business Daily, as they always do, wrote an easy to understand summary of the company in early October
- The military knows that what it can't see can hurt it. Axsys Technologies (NasdaqGS:AXYS - News) makes lenses and systems that help it see incoming missiles through dark, cloudy skies, or peer down on troops in distant battlefields.
- With still-hot wars ongoing in Afghanistan and Iraq, and civilian border-security issues heating up at home, Axsys is selling its systems faster than it can make them.
- The Rocky Hill, Conn.-based company's sales were $60.3 million in the second quarter, which ended in June. That was up 40% from a year ago. Its backlog of orders grew to a record $174.1 million. The 54 cents earnings per share was also up 54% from a year ago.
- "The company appears well positioned for long-term success in light of its exposure to the fast-growing infrared market," wrote Stephens Inc. analyst Tim Quillin in a client note. Stephens estimates that infrared imaging is a $5 billion-a-year market globally. About 80% of that is military spending.
- At the same time, the Pentagon is increasingly fond of pilotless drones, which can safely and stealthily prowl over battlefields and insurgent bases. It more than doubled use of such drones in 2007, logging more than 500,000 hours in Iraq and Afghanistan. Flight hours could crack a million this year. The small, remote-controlled planes need infrared cameras and lenses to see things the human eye cannot. And to deliver a usable image, they need advanced gimbals and stabilizers -- another Axsys specialty.
- Today, Axsys is split into two divisions. The Imaging Systems Group makes optical and motion-control components that are sold to other contractors and incorporated into larger systems. Sales there made up 65% of total revenue in the last quarter. Infrared lenses were a high-margin, fast-growing product in that group.
- The Surveillance Systems Group division designs and makes stabilized and non-stabilized camera systems for air, sea and land mounts. These are the pole-mounted cameras that watch the borders, or the eyes aboard Predator drones and television news helicopters.
- Direct government sales accounted for only 3.6% of revenue in 2007. But 66.4% of the year's revenue came from subcontractors that incorporated Axsys' parts into larger systems and weapons platforms.
- Axsys still has value to private-sector firms. Hollywood filmmakers and television broadcasters turn to its stabilizers for cameras mounted under helicopters, for instance. Even those civilian systems use sophisticated military-grade parts. The components are so sensitive, in fact, that the Bush administration had to grant a temporary waiver for a British company to bring Axsys' camera stabilizers into China for helicopter broadcasts of the Beijing Olympics.
- The company says its ramping up engineering to develop new products and improve existing ones. For instance, the company is working on smaller gimbals for unmanned vehicles. It's developing laser range finders and new radar sensors, Bershad told analysts after the last quarter.
- "So there's still, I think, a lot of opportunity out there, not the least of which is penetrating the existing markets we're competing in," Bershad said in a conference call with analysts. "You know we have a significant competitor out there who we'd really welcome the opportunity to take more share from." That significant competitor -- Flir Systems (NasdaqGS:FLIR - News) -- also relies heavily on military contracts for its thermal imaging and infrared vision systems.
- All are subject to the same lumpiness inherent in weapons systems contracts. And all face the same uncertainty around future military spending in the next presidential administration. But most military budget analysts think that whoever wins, spending on sensors and vision technologies will continue.
No position but strongly considering
