Tuesday, November 25, 2008

Sky's The Limit With TAT Technologies

TAT Technologies (TATTF) is an Israeli company that repairs and manufactures parts for airplanes. Its market cap is just $32 million, which is too small for large institutions to buy decent-sized stakes without dramatically altering the stock price. As we would expect, instituational ownership of this company is just 2%. With a P/E of 6 and a P/B of just 0.4, it deserves a closer look. Reyer initially took a look at the assets of this company a few months ago, but it has since gotten cheaper.

TATTF has cash of $44 million, accounts receivable of $21 million, and inventory of $38 million. All of its liabilities add up to $62 million, with debt representing only $5 million of this figure. Therefore, these three liquid asset items minus all liabilities actually add up to more than the company trades for! (44+21+38-62=41 > 32).

With a valuation like this, one would expect the company to be in dire straights, losing money hand over fist. However, the company has been profitable throughout the last several years, and was so even in its last quarter ending September 30th. In fact, in its latest quarter it grew year-over-year revenue across all three of its segments. In the first 9 months of this year, it has made $3.5 million dollars!

However, TATTF is dependent on activity in the aircraft sector. The airline industry will undoubtedly suffer in the short-term despite lower fuel prices, as the economy has taken a turn for the worse. However, TATTF also has exposure to military customers, which aren't subject to the same patterns as the private sector. Also, more than half of TATTF's revenue comes from repair services largely based on long-term contracts. TATTF further added to its list of contracts in the 2nd quarter, thus lowering the risk of unexpected shortfalls in demand.

While no one can predict the length of this downturn, those with a long-term view should look for companies with the financial strength to survive for several years until things improve. TATTF is well positioned to survive thanks to its low debt position, high liquid assets, and long-term contracts, and should thus eventually emerge with a stock price far greater than where it currently stands.

Disclosure: None


Anonymous said...

I've looked at this company before and I was just a little confused by the accounting. They own like 65% of that Limco-Piedmont company and from what I gathered was that they were in the same MRO business.
What was your take on all of this? I couldn't figure out how they accounted for this ownership and I just got confused by it.

Saj Karsan said...

Hi Anon,

Limco-Piedmont financials are consolidated into TATTF's financial statements. The "minority interest" line items you see represent the claims of ownership against Limco that arise because TATTF does not own all of Limco, as you said.