Wednesday, February 18, 2009

Axsys Technologies (AXYS) Solid Report; Cramer Mention

A reader brought Axsys Technologies (AXYS) to my attention and it looked quite appealing from a fundamental standpoint. However, the stock has been in a freefall for months. In fact, I've had multiple limit orders to short it near the 50 day moving average (red line) the past 6 weeks and it has never come within sniffing distance. I should of not been quite the perfectionist looking for a perfect entry point back in early January when the stock was above $50 [Jan 7: Update on Axsys Technologies Short Idea]

I am a bit perplexed at why the stock is so weak, but it is what it is. Yesterday the stock reported a solid number (missed by 2 cents but guided in line) - judging from the harsh reaction to the stock you'd think they were missing by 30%, or guidance was going to see a large reduction. Frankly the stock is dirt cheap but as we've seen with other names - fundamentals mean nothing if the stock is not the flavor of the day/week. I continue to scratch my head on why it acts so poorly but until it begins to behave and regain some key technical levels it remains more of a short than a long.

Sales were up 34% year over year (both business lines doing well), EPS up 64%, backlog increased 18%, and while gross margin had a dip from 33.2% to 32.5% operational margin skyrocketed from 13.7% to 17.3%. Yet you'd think there was some subprime mortgage business hidden in a back vault from watching the stock.
  • During the fourth quarter of 2008, Axsys generated sales of $63.9 million, compared to $47.9 million in the fourth quarter of 2007. Net income was $6.7 million or $0.58 per diluted share, up from $5.8 million or $0.51 per diluted share in the fourth quarter of 2007. {A $123 thousand loss from our discontinued operations adversely impacted net income in the fourth quarter of 2008 compared to $1.7 million of net income from discontinued operations in the fourth quarter of 2007.}
  • Our income from continuing operations was $6.8 million or $0.59 per diluted share, up from $4.1 million or $0.36 per diluted share in the prior year period.
  • Continued strong demand for infrared cameras and lenses drove sales growth in the fourth quarter of 2008. Gross margin decreased from the comparable quarter last year due to product mix and increased overhead associated with the new Nashua facility. Improved leverage on our operating expenses resulted in higher operating margins in both business segments, which caused a significant year-over-year increase in diluted earnings per share.
  • The Surveillance Systems Group increased sales by 30% compared to the comparable quarter in the prior year. Continued strong demand for a variety of camera systems, especially for land-based perimeter security and border protection applications, drove the growth in this segment.
  • The Imaging Systems Group's sales grew 35% year over year. This segment's growth was primarily driven by increasing demand for infrared technology.
2009 Guidance was reiterated
  • Revenue $278 to $282M
  • Diluted EPS $2.66 to $2.72
  • Backlog $165.1M

Looks like someone notified Jim Cramer of this name as it made his Mad Money Show Friday (a curse as much as it is a blessing)

Axsys makes high-performance surveillance cameras and imaging systems, used for everything from missile tracking to unmanned drones to vision enhancement. They offer life-saving applications, such as those used in the Army’s “We Own the Night” strategy in Afghanistan, and they act as force multipliers, which means more can be done with fewer boots on the ground. Given Obama’s Iraq withdrawal strategy, that sounds like a business he could get behind.

Axsys supplies the usual suspects – Department of Defense, Border Patrol, Raytheon [RTN]
, Northrop Grumman [NOC]
, Lockheed Martin [LMT]
, Boeing [BA]
, Thales – and there are a number of potential new contracts on the horizon as well.

The company teamed up with Raytheon and BEA Systems in hopes of landing a $2 billion deal for something called Drivers Vision Enhancer-Family of Systems, which improves drivers’ vision, especially at night. And Saudi Arabia is offering a $2.5 billion border-security contract, part of which could go to Axsys.

There’s recurring revenue here, too, generated through replacement parts for previously sold equipment. This accounted for 70% of Axsys’ bookings last quarter. Going forward, the company expects to ship 91% of its $184 million in backlog orders over the next year.

The stock is 49% off its high, thanks to a J.P. Morgan downgrade back on Dec. 10. But since then the same analyst has upgraded Axsys twice. It’s just this tough market that’s keeping the share price down.

Axsys trades at just 13 times expected 2010 earnings with a long-term growth rate of 19%. If the multiple matches that growth rate, which could happen, then this $40 name jumps to $56. If not, the stock at this level might attract a takeover bid. And a premium offer would give investors another chance to profit.But, of course, this is a small company. Its market cap totals just $835 million.

[Dec 23: Axsys Upgrade]
[Dec 12: Time to Buy Axsys Technologies?]
[Dec 5: An Outperfomer in Defense: Axsys Technologies]

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