Techprecision Corp (TPCS.OB) reported fiscal 2011 second quarter results last week, continuing a trend of rising backlog and consistent profits.

The new CEO seems extremely confident in the future prospects for the company but the stock remains undervalued despite a recent run-up in price.

Financial Highlights

Second quarter revenues were $8.4m, compared to $15.1m in the prior year quarter. However, the 2009 quarter was affected by a non-recurring inventory transfer to the company’s largest customer, GT Solar.

I’ve written about TPCS’s dependence on GT Solar before – TPCS receives much lower margins on raw inventory transfers versus shipping finished goods.

Adjusting for this one-time cost, sales increased 25% over last year’s results, along with a sequential increase from the first quarter.

Although gross margins were around 30%, operating expenses increased $500k to 13% of total sales compared to only 4% of sales last year.

The increase is partially due to the hiring of new sales personnel to cover the mid-Atlantic market. The expense increase was also impacted by the CEO search (recently completed in July with the hiring of James Molinaro).

Net income was $855k or $0.04 per share fully diluted compared to $0.06 per share last year – YoY comparables are difficult due to the materials transfer last year.

Through the first six months of fiscal 2011, the company has generated a net profit of $1.6m, up 40% from the same time last year.

TPCS generated $1.1m in free cash flow despite a significant increase in capex costs associated with the purchase of a new gantry mill to upgrade and modernize the company’s manufacturing equipment. The mill’s total cost is $2.3m and will be spread out over the remaining quarters of 2011.

The balance sheet remains solid with a cash balance of $9.24m compared to total liabilities of $8.1m. The stock’s current ratio is 6.1.

Future Growth Opportunities

Total order backlog increased from $21.5m at March 31, 2010 to $26.4m as of the September 30, 2010 filing. It further increased to $31m as of November 1, 2010.

The sales efforts for the company have paid off with several large orders from existing customers:

• Sept 8 – $2.9 Purchase Order from Existing Tier-1 Clean Technology Customer
• Sept 29 – $3.9m Purchase Order from Solar Customer
• Oct 13 – $6.7m Purchase Order from Solar Customer

Even better, TPCS announced an exciting expansion opportunity in the fast growing Chinese market by creating a company subsidiary to meet the growing demand for local manufacturing and machining from its customers.

This new local arrangement resulted in a $2.9m purchase order, and the company expects a significant increase in business with multiple customers as a result of this arrangement.

According to Mr. Molinaro, TPCS’s CEO,

“Demand for solar, nuclear and industrial components is growing globally, but this demand is increasing most in Asia and especially China…Already, 80% of poly silicon panels and many nuclear reactors are scheduled to be built in China, and our customers indicated interest in expanding business with TechPrecision if we could support them locally in Asia”

Reverse Stock Split

The latest proxy statement shows a new amendment giving the Board of Directors the power to affect a 1-for-2 reverse stock split. According to the filing,

“The Board believes that the Reverse Stock Split is an effective means of increasing the per share market price of our Common Stock in order to achieve the minimum per share stock price necessary to qualify for listing on well-recognized stock exchanges, such as the American Stock Exchange or the Nasdaq Capital Market. “

Currently trading on the OTCBB, the uplift of TPCS to a major exchange will significantly increase its exposure to individual and institutional investors, likely resulting in a big boost to the stock price.

The shareholder meeting for this proposal was on November 22, and the amendment was subsequently approved.

Conference Call

Management held its second quarter conference call, and seemed extremely bullish on the company’s prospects going forward.

A few notes from the call:

• Management’s goal is 4 new Tier-1 customers before the end of fiscal 2011
• First Tier-1 gas generation client will have prototype done in mid-2011 with full production in 2012; expect a significant increase in business from this market
• Stillwater is finishing up the medical beam prototype and expects to complete clinical trials in mid-2011. The university has hired a prominent specialist to head up the new unit, showing a commitment to the proton beam therapy
• New China operation will provide slightly higher margins and some tax advantages. Will also better serve the solar market in China (GT Solar has more orders than capacity through at least 2012!)
• China operation will also give them access to the nuclear market. U.S. has 104 old reactors but China is building rapidly with 10 new nuclear plants planned

Valuation

Trailing TTM diluted EPS is $0.12, giving the stock a current P/E ratio of 10.42. Based on management’s bullish prospects and the increasing order backlog, 2011 fiscal results should come in higher.

Assigning a more reasonable multiple of 12 to conservatively estimated 2011 EPS of $0.16 would equal a share price of $1.92.

An even better valuation metric is EV/EBITDA. TPCS’s EV/EBITDA ratio is only 3.77, very cheap for a growing, profitable company riding the clean energy wave.

Risks

An investment in TPCS does have risks around customer concentration and common stockholder dilution.

Although the company has focused hard on expanding its operations outside of the solar market, 54% of quarterly revenues were from GT Solar. The loss of this customer, or even a pullback in demand similar to 2009, would have significant consequences.

In addition, the share count has been increasing each year through a combination of stock warrants, options, and convertible shares. The company has seen some turnover in its executive ranks, which leads to the corresponding options grants.

Hiring a new CEO is expensive for a small company from an ownership perspective. However, the new CEO has a great deal of experience in the solar space, and seemed extremely confident on the conference call on the future direction of TPCS.

Conclusion

Despite the solid report, a company insider has sold a significant chunk of stock in the past month, a possible warning sign.

I’ll be keeping a close eye on TPCS and evaluating my exposure, but I like the direction the company is headed.

The downside is limited due to the strong balance sheet so the investment thesis depends on management’s ability to capitalize on the company’s growth opportunities.

Disclosure

Long TPCS

As I mentioned in my 2010 year-end write-up on Techprecision Corp (TPCS), I was hoping that first quarter numbers would provide a much cleaner picture of the ‘normal’ operating results for the business.

Well, TPCS reported first quarter results for fiscal 2011 last week and the market approved, as the stock jumped 20%.

Financial Highlights

Net revenues were up 85.4% to $6.2m compared to the first quarter revenues last year.

Most of this rise was attributed to the resumption of orders from the company’s largest customer, GT Solar. GT Solar’s orders totaled $3.7m, compared to zero in the corresponding quarter last year.

Gross margins were 37.6%, much higher than the 17% gross margin in the same period last year. Margins were artificially depressed last year due to a large shipment of raw inventory in August 2009.

Until the inventory is worked off, TPCS will benefit from higher margin, service-based sales. With a more evenly mixed batch of services and product sales, the company’s gross margin should end up in the high 20’s on a percentage basis.

For the quarter, the company turned in a profit of $819k, a substantial improvement on the quarterly loss last year.

Revenue & Backlog Composition

While it is good to see the resumption in sales to GT Solar, an important part of my investment thesis is that the company is able to diversify its business.

Total backlog increased from $21.5m last quarter to $25.2m for the quarter ending June 30, 2010. This is a key indicator of TPCS’s prospects going forward.

Looking closely at the revenue numbers, the company’s other business segments outside of solar energy lagged, coming in approx. $900k lower than the same period last year. These are large complicated contracts, so some variability in quarterly results is expected.

Based on future outlook however, the company’s prospects seem to be bright – Non GT Solar backlog in the quarter was $17.3m compared to $11m at the same time last year.

Future Growth

According to the company:

“We believe that rising energy demands along with increasing environmental concerns are likely to continue to drive demand in the alternative energy industry, particularly the solar, wind and nuclear power industries. Because of our capabilities and the nature of the equipment required by companies in the alternative energy industries, we intend to focus our services in this sector. ”

As an example of this potential, on August 6, TPCS announced a multi-million dollar letter of intent from an emerging clean tech firm.

This order should translate into several thousand dollars of project engineering revenue in the next few months, initial production units within the next year, and a heavy increase in sales revenue in 2011 and 2012.

New CEO

After a lengthy search, the company announced the hiring of James Molinaro as the new CEO on July 22.  Mr. Molinaro has a diverse background, with over 26 years of experience in solar and semiconductor equipment production.

According to the press release, at his previous company Mr. Molinaro

“was responsible for diversifying the Company’s revenue streams and expanding business opportunities by tapping into the lucrative solar energy, military application and ink jet printer markets, increasing annual sales by approximately $32 million to $83 million over a four-year period. “

Hopefully he can guide TPCS on a similar path.

Although this was a necessary step for the company, hiring such a senior executive can also function to dilute existing shareholders due to stock incentives. Mr. Molinari’s offer letter allows for option grants for up to 1M shares of company stock, a substantial number.

Conclusion

Looking back, TPCS was trading north of $3 a share in 2007/2008 before GT Solar’s business took a nose dive, so the market has certainly priced in growth potential for the stock before.

As TPCS’s largest customer, GT Solar seems to be having a good year, as the stock is up over 50% YTD after reporting an order backlog of over $1B – hopefully this backlog will lead to increased sales for TPCS.

The dark days of 2009 seem to be behind the company.  While still cheap based on current financials, the stock should jump considerably if GT Solar’s business continues to rebound or if one of the other business segments takes off.

It remains to be seen whether the new CEO can use his expertise to further diversify and grow the business.

Disclosure

Long TPCS

Techprecision, Corp (TPCS) reported fiscal fourth quarter and full year results last week – the stock has been hammered in the week since.  Yearly results still reflect the order cancellation from the Company’s largest customer, GT Solar, in April 2009.

Although orders have picked up again from GT Solar, this event threw off the Company’s numbers for the entire year.

Financial Results

Sales decreased 25.7% for the fiscal year, with EPS dropping from $.23/share to $.15/share, primarily driven by lower sales and margins.

As part of the order cancellation in April 09, TPCS sold off a large chunk of raw material at much lower margins than usual. I’m anticipating gross margins should return to near 2008/2009 levels, with the Company reported 4th quarter margins of 40.3%.

Total debt to equity has dropped slightly from .7 to .63. The Company also reduced diluted shares outstanding by almost 5m:

On August 14, 2009, the Company entered into a warrant exchange agreement pursuant to which the Company agreed to issue 3,595,472 shares of Series A Convertible Preferred Stock to certain investors in exchange for warrants to purchase 9,320,000 shares of common stock. The warrants carried exercise prices ranging from $0.44 to $0.65 per share.

Owner earnings came in at 1.5m for the fiscal year.

Key Metrics

Revenue Composition

Defense and Nuclear were both up a decent amount in 2010 on a percentage basis. Nuclear was one of the exciting growth prospects I identified in my original writeup of TPCS, so it’s encouraging to see an increase there.

Despite the Company’s efforts to broaden their sales composition, Alternative Energy still makes up 52% of total sales.

Backlog

Order backlog stood at $21.5m on March 31, 2010, an increase of $5.8m from the previous quarter.

Although the raw numbers are down, non-GT Solar backlog has increased significantly, both in dollars and percentage of total backlog. This is a very good sign as the Company tries to mitigate the risk of being dependent on such a large customer.

Conclusion

The market has not treated TPCS kindly this year, as it is very easy to focus on the sharp decrease in sales and income.

Could an order cancellation happen again? It’s possible, but, I think it was largely a one-time event that unfortunately affected the Company for the entire year.  In any case, TPCS’s future outlook is better positioned to handle such an event.

On the positive side, quarterly results show signs of stabilization, with increasing demand from not only GT Solar, but also the other business segments.

According to TPCS’s CEO,

“We have seen three consecutive quarters of steady improvements throughout the industries we serve and increased activity including requests for proposals and expanded sales activity.”

Based on 2010 numbers, I will probably lower my intrinsic value target, but I still think TPCS offers at least 50% upside at its current price. After TPCS reports Q1 numbers, I think the stock will get a boost, as the results will show a much cleaner picture of how the business is executing its strategy.

Disclosure

Long TPCS.