I’ve written quite a bit about Techprecision (TPCS.OB) over the past few months (see posts here and here). The company has announced a number of large sales orders in the recent months, and remains poised to capture strong tailwinds across a broad range of industries.

Recent Sales Announcements

• $1.2 Million Purchase Order from New Solar Customer
• $1.19 Million Defense Contract Order
• $900,000 Order from CleanTech Customer
• Continues Accelerated Booking Trend with $1.25 Million in New Orders

For some perspective, the company had revenues of $28m last year – within the last month, they have announced $4.5m in new orders.

Even better, the orders are broadly diversified across a range of industries including Solar, Defense, Medical, and Industrials.

One of the biggest risks with TPCS has been a major reliance on solar (namely their largest customer, GT Solar), so this diversification is a welcome sign.

The $1.2m solar order is also exciting, as it’s the first order out of the new Chinese subsidiary. According to the press release,

“As this customer ramps, the projected volume in two to three years has the potential to exceed the revenue of TechPrecision’s largest current customer.”

A year ago, GT Solar accounted for approx. 30%, or $7m of the company’s backlog, a glimpse at how much this new customer could be worth as it ramps up.

New Investor Presentation

Techprecision also offers a new investor presentation on its website, updated as of March 2011:

[scribd id=50906001 key=key-1fto0cii7h00mq6loxlq mode=slideshow]

Stock Volatility

The stock has been very volatile over the past week, which could have something to do with the earthquake in Japan and subsequent nuclear scare.

While nuclear is a targeted segment for TPCS, less than 1% of 2011 YTD sales occur in this segment (6.28% in 2010).

The stock price has also been hampered as the two insiders (Youtt and Levy) continue to sell shares. While I’d much prefer insider buying, both directors have been selling all year, regardless of the market price.

This short-term volatility does not affect the long-term prospects for the business.

Conclusion

Techprecision possesses a solid advantage with its history of advanced manufacturing to benefit from some heavy tailwinds in its major industry targets.

I remain long (despite the volatility).

Disclosure

Long TPCS

Acme United (ACU) reported fiscal fourth quarter and annual results for 2010.

Revenues increased after the sharp drop-off in 2009, but the company’s margins remained depressed.

Financial Results

For the year, the company reported a revenue increase of $4m, or 7%, to $63m. Sales increased in all of the company’s geographic regions, led by Europe at 14%.

The European division continues to operate in the red, reporting a loss of 487k, although that loss has narrowed slightly from 2009 and 2008.

The U.S. market continues to dominate the company’s business, with 75% of total sales, so the 5% YoY increase in this segment is good news.

Despite the increase in sales, operating income was flat, coming in at $2.98m.

The decrease in margin was mostly affected by higher air freight expense of approx. $500k, as labor shortages in the company’s Chinese manufacturing facility required expedited shipments to meet customer demand.

Net income was 2.52m, or $0.82 per share, compared to $0.86 per share in 2009. However, 2009 results were positively impacted by a benefit associated with the remediation of the disposed Bridgeport facility.

Adjusting for this benefit, net income was up 3.6%.

For the year, the company negative operating cash flow of $1.1m, due largely to a significant increase in inventory going into 2011. According to management, this is a very deliberate strategy to prevent delays going into the company’s busiest time of year.

Owner earnings came in at $2.5m.

New Acquisition

On March 1, the company announced an acquisition of Pac-Kit Safety Equipment Company, a leading manufacturer of first aid kits. This is another long-standing and storied brand, having been around since 1890.

ACU is paying $3.4m for the company, with annual revenue in 2010 was $5.4m. This revenue stream is stable, falling between $4.8m and $5.4m for each of the last three years.

The company expects the acquisition to be accretive in 2010, with operating earnings of $100-150k before operational synergies.

It is a nice tuck-in acquisition for the firm, but probably won’t move the needle significantly.

However, I view these types of combinations as much more shareholder friendly than a larger alternative (with its associated headache).

Risks

The mishaps at the Chinese manufacturing facility are a blow to management’s credibility, but mistakes happen.

Inventory management is extremely important for this type of business – it remains to be seen if the current inventory stockpile is a smart move for 2011.

According to the CEO, ACU remains firmly committed to its Chinese manufacturing strategy, so the company must prove that it can correct these mistakes going forward.

At the same time, margins have shrunk considerably from the 2005-2007 time period (where operating margin averaged almost 11%).

The good news is that this fact leaves room for improvement from the current numbers – however, a sustained downtrend is concerning.

Management also sounded confident on the conference call that they have taken significant action to shoring up the European division. A reduction in non-sales headcount and other operating expenses is expected to save the company 400-600k in euros in the upcoming year.

Even breakeven for this division would provide a nice boost.

Conclusion

While 2010 was not the greatest year, ACU is still trading with a FCF yield of 8.69%, with return on equity a decent, but not spectacular, 10.13%.

EV/EBIT of 12x and EV/FCF of 14x show that the company is fairly valued, but on are calculated on depressed earnings – 5 yr averages for the two ratios come in at 7x and 10x respectively.

Until proven otherwise, I believe that management will not repeat the same mistakes in 2010. They are incentivized to do that – management did not receive any bonuses for 2010, nor any increase in base pay.

Hopefully the bonus situation will improve in 2011 (on the back of a strong year for shareholders of course).

While I’m not adding to my position at current prices, I continue to hold.

Disclosure

Long ACU

As usual, a few of the best value investing links from the past two weeks:

Domino’s Pizza (DPZ)

Long. Domino’s is an established brand name that is opening up 250-300 stores per year, mostly overseas. The international segment is expected to grow 10% next year compared to 2.6% for the domestic business.

Since the international business has much higher gross margins, this growth should provide a boost to operating profits.

The business is very leveraged, so the additional free cash flow can be used to pay down debt, lowering interest expense, which therefore increases free cash flow even further – a virtuous cycle.

The author’s excel models show a potential upside of 30%.

Equal Energy (EQU)

Long. Equal Energy is a Canadian oil and gas exploration company that is turning around with the help of new management. The company current trades with a FCF yield of 25%, with a cash flow stream that is expected to grow significantly over the next 3-5 years.

The company used to be a Canadian income trust and recently converted to a normal corporation focused on longer-term value, a possible catalyst for value investors as income investors flee.

CVS Caremark (CVS)

Long. The CVS drugstore chain is one of the dominant players (along with Walgreens) in a business that is unlikely to go away anytime soon. The company trades at 12x 2011 EPS, yet has a strong industry tailwinds due to the growth in generic medicine and increase in the population age.

The author also highlights the possibility of ‘free call option’ coming due in 2014, with an uptick in the number of people with prescription drug coverage (due to the new health reform law), which would provide a significant boost to CVS.

Warren Buffett’s Annual Letter

Warren Buffett released his 2010 letter to Berkshire Hathaway shareholders.

Required reading for any serious value investor, Buffett provides an estimate of Berkshire’s normalized earnings power – $17b pre-tax or $12b after-tax.

He also sees a ‘normal’ economic climate as somewhat better than 2010 but weaker than 2005 or 2006.

To quote Buffett:

“We are not natively smarter than we were when our country was founded nor do we work harder. Butlook around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and1941, America’s best days lie ahead.”

Suggestions

If you have links or suggestions to detailed analysis from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

No positions.