Thursday, October 28, 2010

Techprecision Corporation

Techprecision (TPCS) manufactures precision metal components at its 125K square foot facility in Massachusetts. The company has generated operating income of about $20 million in the last four years, yet it trades for just $15 million.

As a manufacturer of heavy-duty equipment, the company will experience highly cyclical revenue cycles. When capital spending is cut, as is the case during recessions, a company such as this one is likely to see negative profits for some time. This is what creates buying opportunities, since stock prices will often overreact to the downside. What's important to look for in such cases is a strong financial position, which allows a company to outlast downturns. Techprecision has $10 million of cash against just $6 million of debt, which should allow it to weather any revenue shortfalls.

Techprecision also has exposure to growth industries; that is helping it achieve profits even in this tough environment. Techprecision sells to customers in the nuclear, solar, wind and other alternative energy industries. As a result, revenues have rebounded somewhat, allowing the company to generate around $1.7 million in profit over the last three quarters.

Unfortunately, the company does not trade on an exchange, some of the risks of which are discussed here. However, the company appears interested in joining either the Nasdaq or AMEX, which could serve to boost its valuation should that occur. The company has asked shareholders to approve a reverse stock split split, so that its stock trades well above $1. Why is that important? The following statement from the company's proxy statement illustrates the company's motives:

"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. The Board will only effect the Reverse Stock Split in connection with an application to list our Common Stock on such stock exchanges. It will not effect the Reverse Stock Split for any other purpose."

There are some risks facing this company, however. First of all, it is heavily reliant on one customer for 60% of its revenue. If that customer were to lose market position, or realign its suppliers, it could seriously harm Techprecision. Thus, only investors who understand the persistence of Techprecision's market position should consider investing.

Furthermore, the company has a number of outstanding convertible pref shares that could dilute current shareholders considerably. While the company has only 14 million shares outstanding, it has 21 million diluted weighted average shares in its last quarter.

Techprecision appears cheap and could see a catalyst benefit were it to join a recognized exchange. However, its reliance on one major customer and the potential for some dilution could turn some potential investors off. Each investor must decide for himself if this company makes sense for his portfolio.

Disclosure: None


Anonymous said...

Hey Barel,

love your blog. Just a quick and dumb question for you. But how do you begin to search for companies -- how do you get to a list you think might be interesting. I just have no idea where to begin. Sorry if this is an unanswerable question.



Ankit Gupta said...

I haven't dug into it, but the 21M diluted shares is calculated assuming other securities are in fact dilutive. Depending on what kind of dividend those preferred's get, they could very well be antidilutive and then they aren't factored into the calculation. This means that if things did improve and they eventually became dilutive, the outstanding share count could be even higher.

I doubt this is an issue here, but as an investor, I think one important tool we can add to our set is calculating basic/diluted EPS accurately. It isn't just as straightforward as commons vs. everything else converted to common, because it only takes into account presently-dilutive securities. What is dilutive today may not necessarily be dilutive tomorrow, or the other way around.

Saj Karsan said...

Hi Shaun,

I tend to hear about stocks from other value investors, other like-minded sites, stock screens, and in general just a lot of reading.

Unknown said...

Thanks for the blogging :)
This company does indeed look cheap.

However, without a detailed examination, I do notice something that concerns me.

TPCS has continuously issued shares over the last several years, and has 40% more shares outstanding than just 3 years ago.

Share issuance is a valuable tool for a company, but you do not expect or want to see it in a company selling below its intrinsic value. The share issuance suggests that to me that one of several things may be at play here.

1) The company is not actually so cheap, and management knows it.

2) The company is actually cheap, and management is diluting the common shareholders, either through incompetence, or through their interests not being aligned with the common shareholders.

3) The company is desperate for cash, and is issuing shares regardless of their cheapness. I see no evidence of this, but I mention it as a possibility, since this is one reason companies will issue shares.

Unfortunately, none of these options look appealing to me when considering TPCS as an investment thesis.

Anonymous said...

Hey Saj,

Thanks for that - it makes sense. Are there any other sites that you particularly like?


Saj Karsan said...

Hi Shaun,

Too many to name! If you go to twitter you can look at all the value tweeters I follow.