GEO Investing

With the fiscal cliff looming and concern by many investors that an overall economic slowdown as head of us, the near-term investing landscape has changed since the 2012 first quarter earnings reporting period. 2012 Second quarter earnings reports may give us a glimpse into the challenges that GeoBargain and GeoSpecial stocks could face for the remainder of the year. With each passing quarter we are hopeful that investors will begin to realize that not all stocks will be impacted by the bombs of pessimism that the press continually drops. Now more than ever it is crucial to find companies that report strong earnings or at the very least and even more importantly, provide guidance to give investors the confidence needed to make sound investment decisions. Here is a review of the financial performance of some GeoBargains and GeoSpecials that have already released second quarter 2012 results, as well as a look into others that have yet to report.

Cpi Aerostructures (NYSE:CVU), GeoBargain

This morning, CVU reported second quarter 2012 EPS of $0.36, continuing its strong financial performance thus far for fiscal 2011.CVU has introduced some uncertainty into its story.  Although the company has stated confidence in its 2012 financial guidance, unlike in past press releases the company did not affirm its 2013 guidance in its 2012 first quarter press release. The company commented that it intends to issue 2013 guidance after more clarity is provided regarding the impact, if any, resulting from possible defense budget cuts that could be implemented by year’s end.  In today’s press release, the company stated “we continue to believe it prudent to refrain from providing 2013 guidance until the federal budget situation becomes sufficiently defined.”

We are treading  cautiously  going into the remainder of 2012 because of the possibility of soft 2013 guidance..

Adding to investor concern was the recent offering of common stock that was announced on June 7, 2012.  We were extremely disappointed since it appears that the stock was manipulated days before the announcement of the offering.  The stock fell from $15 level to around $12.00 – $12.00 was the price that the offering was priced at!  We were not as surprised when we learned that Roth capital was involved in the offering.  Recall that Roth helped many ChinaHybrid companies raise money in the past in a space that we believe is still riddled with stock manipulation.  Investor concern was also spawned by the fact that insiders sold a large portion of their holdings as part of the offering.

Since the offering only affected one month of the 2012 second quarter, the impact on the dilutive share count for the second quarter 2012 was not significant. Thus, the company was still able to beat analyst EPS estimates of $0.33 by reporting a $0.36 per share for the quarter and growing EPS 64% over last year’s second quarter.  Going forward, CVU’s dilutive share count will increase around 14% to 8.2 million.  Applying the low end of CVU’s guidance of $11 million in net income for fiscal 2012 would imply that the company would report EPS of $0.82 for the second half of 2012, which is only $0.06 below analyst estimates for the same period. The high end of CVU’s 2012 net income guidance would imply that the company would report EPS of $0.94 for the second half of 2012 which is $0.06 higher than analyst estimates. So basically, it appears that analyst had baked in a share offering assumption in their estimates.

Regardless, while we cannot comment on CVU’s 2013 prospects, 2012 has still been a banner year for the company and it should be able to meet its 2012 guidance goals.  This assumption is confirmed by very bullish commentary that took place at an investment conference held on June 20, 2012 and today’s second quarter conference call.

Once investors piece this story together, they may again load up on shares once more clarity is provided on the budget uncertainty issue.  We are speculating that CVU offered shares ahead of this uncertainty.

Key Tronic (NASDAQ:KTCC), GeoBargain & SMTC Corporation (NASDAQ:SMTX), GeoBargain

We are still optimistic on the near-term (3 to 6 months) growth stories of both KTCC and SMTX since customers typically place orders six months out.  However, both companies serve the technology industry which as a whole has been a weak performing industry of late amid the paring down of industry growth rates due to uncertainty that the European global recession could spread to the U.S.  Although neither company has significant European exposure we need to be cognizant that U.S. companies could delay growth plans until more clarity arises out of Europe.  SMTC Corporation reports second quarter 2012 results on 8/9/2012 after the market close.  KTCC will be announcing fourth quarter and full year 2012 results on 8/21/2012 after the market close.  We expect both companies to report strong 2012 second quarter results.

Tgc Industries (NASDAQ:TGE), GeoBargain

Tgc Industries reported weak second quarter 2012 results.  Here are some comments from the company on why they reported weak results for the quarter:

“As in prior years, our second quarter results were negatively impacted by the spring thaw, which resulted in the seasonal shutdown of our seven crews operating in Canada. Due to the large amount of data acquired during our record first quarter, we incurred substantial clean-up and personnel costs that negatively impacted the gross margin in the second quarter. In addition, late in the quarter we incurred start-up costs for the activation of our ninth U.S. crew, which was not operational until early July. The combination of these costs prevented us from reporting a profit in the second quarter.”

Although we remain cautious about the third quarter 2012 results, the strong backlog of approximately $112 million, which has more than doubled from a year ago, will prompt us keep TGE coded as a GeoBargain.  Furthermore, new reduced EPS estimates still have 2012 EPS growing 43% to $0.76 and 29% to $0.98 in 2013. The company was quite optimistic about second half of this year.  The current challenge will be for growth to be strong enough to beat analyst estimates for the back half of 2012.  The company stated that they expect 2012 sales and EPS results to exceed 2011results.   However, due to the huge 2012 first quarter the company could conceivably beat 2011 results with sub-par second half results.  On a positive note, during the 2012 conference call, the company stated that they plan on having as many crews operating in Canada during the 2012 fourth quarter as they did in the first quarter of 2012, when they reported EPS of $0.60.  This could imply that the company is set for a big 2012 fourth quarter and possibly easily surpass the EPS estimates of  $0.19.  Overall, analysts are not forecasting consistent above average growth until the June 2013 quarter, which we presume could affect the timeliness of TGE shares in the near-term.

Titan International (NYSE:TWI), GeoBargain

Titan reported second quarter 2012 results which were strong but missed analyst EPS estimates of $0.64.  The company talked about delays in the quarter that were one-time events and if not for those delays stated second quarter 2012 “could have been even bigger”.  The company is in the process of closing an accretive acquisition.  We believe investors are awaiting the specifics on the financing of this deal.  The company’s second quarter 2012 conference call was very bullish on all fronts.

GoldField (NYSE AMEX:GV), GeoBargain

Strong commentary from Quanta Services (NYSE:PWR) may bode well for GV.  Quanta’s second quarter 2012 press release and conference call contained bullish commentary regarding the electric power industry.

“We believe the industry is in multiyear transmission investment trend.”  Read more here.

Also encouraging is news that GV recently purchased $8.4 million worth of new equipment.

The 2012 second quarter should set the tone for the stock for the remainder of the year.  Specifically, we need to see if GV’s Texas project is able to hold recently improved margins that is experiencing in GV’s core business.

Neenah Paper (NYSE:NP), GeoBargain

We are cautiously awaiting the announcement of NP’s 2012 second quarter financial release.

Specifically, it is unclear how the company will be impacted by the weak growth in the Euro zone.

Taylor Devices (NASDAQ:TAYD), GeoSpecial

In its fiscal 2011 year ended May 31, 2011 the company reported a very strong fourth quarter which led us to code it as a GeoSpecial on 09/07/2012 @ $6.80. Although we feel the 2012 fourth quarter may not be a strong quarter, we believe investors could look past this quarter, buying on dips, and focus on improving margins expected to take place in 2013 due to expansion-related costs nearing an end.

Tor Minerals (NASDAQ:TORM), GeoSpecial

We felt that TORM could have been the biggest sleeper of all our GeoBargains and GeoSpecials.   Please see our year-end review note here. Here is positive commentary from the first quarter of 2012:

“We are off to a strong start for 2012, and if current trends continue, we are well positioned to exceed our targeted growth rates of 15 to 20 percent and post another record year.  Already, we have customer demand to fill half of our expanded alumina plant capacity and based on our current assessment of market demand for TiO2 pigments, we expect favorable pricing and volume trends to continue in our TiO2 pigment business. With strong market demand, we also foresee good opportunities for the future sale of available synthetic rutile to third parties,” concluded Dr. Karasch.”

Considering this commentary and the $11 million purchase order announced on 5/21/2012 which was supposed to be filled and recognized in the second quarter 2012, we felt TORM had the chance to report a huge quarter.  However, on 7/16/2012 TORM announced that the purchase order would be pushed to the third and fourth quarters of 2012 and that the order size was reduced by approximately 20%.  Thus, the second quarter 2012 results, although strong, were not as strong as anticipated.  The company still reported second quarter 2012 EPS of $0.45 vs. $0.30 in prior year quarter, with revenues increasing 35% to $14.1 million.  These numbers are more impressive when we consider that the company paid a ~25% tax rate during the 2012 second quarter compared to only a 7% rate during the 2011 second quarter.

Conference call notes:

  • Positive industry forces that have fueled growth over the last 2 years remain intact. For Example, one of TORM’s principle synthetic pigmentation products is benefiting from increased raw material prices and supply shortages from competing products.
  • Furthermore, price increases that the company implemented in 2011 are finally meaningfully impacting results. It is important to note that a good deal of TORM’s growth is being driven by product price increases versus increase in volume. Ultimately, we would like to see volumes increase. It appears that the granting of this wish may be around the corner, since, as mentioned during the 2012 2nd quarter conference call, the company stated that several of its customers are completing the testing phase and increasing demand for the use of one of TORM’s principal products.
  • North American sales are more than offsetting weak European sales.
  • The company is offsetting increased raw material costs by implementing manufacturing efficiencies slated to be completed by mid-2013.
  • This will result in annual cost savings of over $2 million or around $0.60 per share.

TORM’s share price sharply declined in recent weeks from around $18 to its current price of around $14. Two factors can be identified that may have affected this price action.

  • The delay of the large purchase order that was originally expected to be completed in the 2012 2nd quarter. We view this development as a non-factor since the product order, even after taking into account the reduction of the order, will still be filled during 2012.
  • In recent weeks there has been chatter insinuating that TORM’s TiO2 pigments would be negatively affected by the unwillingness of the market to accept increases in the price of commodity TiO2 and other colored pigments in paint and plastic formulations. However, TORM’S pigmentation product is not a commodity since it is a synthetic alternative to pigmentation commodities. Furthermore, TORM’S product has an advantage of being 10% to 20% less than the commodity. Thus, we see this issue as an opportunity for TORM to gain market share.

At the current time we believe that TORM can deliver at least two more quarters of exceptional sales and EPS growth.

Last week TheStreet.com downgraded TORM based on the negative operating cash flow reported during the 2012 2nd quarter. This is what happens when research outfits attempt to dehumanize the research process by resorting to automated computer models.  After listening to the 2012 2nd quarter conference call it appears that the negative cash flow situation was the result of temporary increased inventories to lock in lower raw material prices and to gear up for the anticipated sales from the large purchase order that was expected to be filled in the 2nd quarter. Moving forward, we believe that the cash flow situation should improve as the company expects reduced inventories and finally fills the large purchase order.

We encourage investors to listen to the 2012 second quarter conference call.

Sifco Industries (NYSE:SIF) and Versar (AMEX:VSR) – GeoSpecials

We are cautious on both Sifco and Versar due to the uncertainty with the federal defense budget.  SIF offers little to no commentary in its releases and does not hold investor conference calls for quarterly earnings, so it is hard to grasp how the looming budget cuts may affect the company.  VSR has had sporadic top and bottom line growth over the past several quarters.  Revenues have been slightly down this fiscal year while EPS has been improving. We are awaiting the next quarterly releases for both companies to reevaluate if they meet our GeoSpecial requirements

Other stocks we are actively tracking

Ceco Enviromental (NASDAQ:CECE), GeoBargain on the Radar

In our July 17th, 2012 premium email we discussed that GeoBargain on the Radar CECE had recently announced several new orders totaling $9.8 million.  With improving margins, a steady flow of new orders, and for reasons cited in our 3/14/2012 bullish special situation report, we feel the second quarter 2012 could be a strong quarter for CECE, potentially exceeding analyst EPS estimates of $0.15. We do not believe that analyst estimates reflect recent margin strength. Second quarter 2012 results are to be reported on 8/9/2012.

Manitex Intl (NASDAQ:MNTX), Ex-GeoBargain

The company keeps increasing backlog:

  • As of December 31, 2011 the backlog was $83 million.
  • As of March 31, 2012 the backlog was $133 million.
  • As of June 30, 2012 the backlog was $150 million.

The company recently completed a small offering, raising $4.1 million dollars, likely in order to ramp up for increasing demand.  The offering was not overly dilutive and was priced at $8.25 per share, which was near open market price at the time.

MNTX will report 2012 second quarter earnings after close today.

Wsi Industries (NASDAQ:WSCI), GeoBargain on the Radar

We added WSCI to the GeoBargain on the Radar list on August 6, 2012.

Blog Notes:

  • Company just reported 2012 3rd quarter results.
  • The results exceeded any quarter in the last 10 years by over $2 million.
  • Bottom line profit results also improved with the fiscal 2012 third quarter at $0.21 per diluted share equating to a 51% increase over the prior year quarter, which is also at the highest level in the last 10 years.
  • The company is benefiting from penetration into markets that are experiencing favorable growth trends such as the recreational vehicle and energy industry.
  • Company commentary was upbeat heading into 2013. Furthermore, the company just announced it will be embarking on a plant expansion to gear up for future growth. The planned expansion will double current capacity.
  • We are placing it on the GeoBargain on the radar list.
  • We will attempt to interview the company to determine if the 3rd quarter was a breakout quarter. Keep in mind that the company has had erratic quarterly EPS history.
  • Company guidance implies that the company’s 2012 fourth quarter ending in August will match 2012 third quarter results.

We have gone long WSCI, pre interview.

Disclosure: Long everything except NP

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