Tel Instrument: Over 500% Upside Just To Reach Fair Value Based On Guidance
About: Tel-Instrument Electronics Corp (TIK)
Summary
• Commercial launch of three multi-year contracts finally implemented after many delays.
• Fiscal Q4 guidance ending March 31st implies remarkable turnaround, but prior disclosures say the CEO is sandbagging.
• Tel just reported a 40% sequential increase in revenue, but says another 40% on top of that is on the way in Q1 and thereafter.
Tel-Instrument Electronics Corp. (NYSEMKT:TIK) is a rapidly growing and profitable $14 million dollar micro-cap that has finally implemented their commercial launch of three large multi-year military contracts for new Mode 5 Friend or Foe hardware. A lot has been learned since the publication of my Dec. 3rd Seeking Alpha "Pro" article that strengthens my extremely bullish thesis. I previously stated that Tel remained virtually unknown, which still holds true today, and investors should now be aware that company promises of greater revenue and profitability are finally here.
The company designs and manufactures avionics test and measurement instruments for commercial air transport, general aviation and government/military aerospace and defense markets worldwide. Tel provides instruments to test, measure, calibrate and repair a range of airborne navigation and communication equipment. Its products include AN/USM-708 and AN/USM-719, which are communications/navigation radio frequency avionics flight line testers; TS-4530, an identification Friend or Foe test set and AN/ARM-206, an intermediate level TACAN test set. Tel is the industry leader in developing and producing field-tested, rugged avionic flight line and bench test sets for demanding military and commercial customers. Based in East Rutherford, NJ, the company was founded in 1947 and has been providing avionic ramp and bench testers to both commercial and military customers for the last 35 years. Tel's historical design emphasis has been to provide the customer with user-friendly, rugged, reliable and affordable units. They also offer calibration and repair services. Tel sells its products directly and through distributors to commercial airline and general aviation businesses in the United States and through American export agents and overseas distributors.
Finances
Tel just reported their fiscal Q3 earnings that produced a surprising sequential 40% jump in revenues and Non-GAAP EPS of .09 cents. Tel also guided for fiscal Q4 revenue to increase 25% YOY and to exceed $5.6 million. While this increase is welcomed, it's also too conservative because of prior public disclosures by CEO Jeffrey O'Hara.
We know that in fiscal Q4 ending March 31st that the current three large contracts will produce approximately $5.3 million to go along with the T-47N IFF test sets for $600K and the routine $500K to $600K quarterly repairs, calibration and service work. On the low side we come to revenues of at least $6.4 million, which doesn't include any legacy or foreign orders.
I'm not quite clear why O'Hara would be so conservative, but it seems to me that after several disappointing false starts surrounding full rate production, O'Hara is relishing the opportunity to impactfully capture the market's attention in being able to blow away his own estimates that already reflect a remarkable and sustainable turnaround. Based off these public numbers, Tel would post a 42% increase in revenues YOY and EPS well over .25 cents.
Recent Company Highlights
Tel put out an eye-opening investor presentation in January that details an impressive backlog, increasing sales and higher margins. I sarcastically imply that maybe all of three people have read it due to my frustration with management not communicating with the market more often about their turnaround, although management has indicated that will change.
(click to enlarge)
Conference Call Highlights Included
A new Lockheed Martin F-35 contract is forthcoming soon.
R&D has several new products coming in the upcoming fiscal year.
Margins will steadily rise throughout the upcoming fiscal year.
CEO stated in conference call that he will pre-announce fiscal Q4 results in April.
Initial sales of commercial test sets to key China market.
CEO stated that expected revenue run rate to eclipse $7 million dollars a quarter commencing April 1st.
EPS Model Going Forward
I think O'Hara has made it quite clear where he sees Tel's revenues and net income going over the next few quarters and because the three multi-year contracts will afford very repeatable profitable quarters for a minimum of the next 2 years, let's look at my EPS model. Tel has a virtually fixed SG&A and R&D quarterly expense of $1.1 to $1.2 million since significant R&D expenditures for Mode 5 designs have been completed and fully expensed, but I'll use the higher number of the two.
For upcoming Q4 ending March 31st
With $6.4 million in revenues and 34% margins, that gets us to $2.17 million minus $1.2 million, or net income of $970K, and thus Non-GAAP EPS of .30 cents.
Remember, Tel just started utilizing Non-GAAP numbers to highlight the non-cash charges affecting EPS according to GAAP rules and past PR's have made it seem like the company lost money at first glance.
The Non-GAAP EPS is the true accurate representation of actual profits that Tel put in the bank for the quarter. Tel also has about $14 million in NOLS (Net Operating Loss carry forwards) offsetting tax expense for the next several years. When Tel achieves their $7 million a quarter run rate in fiscal Q1 along with higher margins, I see net income of $1.25 million, or EPS of .38 cents based on 35% margins that were explained in detail by O'Hara. Going back through Tel's filings, they historically hit 40% margins, so 35% maybe conservative.
For the full upcoming fiscal year, I am modeling revenues of $27 million (50% YOY increase) and Non-GAAP EPS of $1.40 a share, or 3X's forward earnings. This leaves a huge disconnect between where the stock is currently trading versus where it should be trading with these metrics at hand, but this will change when the company announces preliminary numbers next month.
Tel Instrument Insider Ownership And Share Structure
Another shareholder friendly consideration when conducting due diligence is the extremely high insider ownership of Tel's shares. Tel has just 3.22 million shares outstanding and per Tel's Schedule 14A filing, all officers and directors, including Sadie Fletcher (wife of deceased former Tel CEO), own over 1.6 million shares, plus long time shareholder Vincent Dowling owns 335K shares in his IRA accounts. Recent Form 4's indicate continued buying of expiring options and open market purchases, despite their already hefty ownership. Remember that old adage, people sell for many reasons, but buy for only one. Tel insiders have not sold any shares in years.
RISK vs. REWARD
As with any micro-cap company, especially one that trades so inconsistently volume wise like Tel Instruments with a small float of slightly over 1 million shares, it is not without risk. Tel has few Institutional holders and is rather illiquid at times. They also don't have the luxury of a lot of cash, although that is on course to change dramatically this year.
A 5-year chart above shows you that Tel spent several years in the $6 to $9 range at a time when the company was consistently losing money and prospects of profits were dim and delayed. Obviously, many threw in the towel out of frustration, but with Tel on the cusp of producing $1.40+ in EPS this calendar year and beyond, investors will soon realize that Tel is trading at 3X's forward earnings. In my many years of trading as a profession, this exact risk/reward setup has yet to fail me.
As I've made my investment case to several investors, TIK is unknown to most, but not for much longer, as April is just a few weeks away. At some point, investors should be able to buy into an argument for a future fair valuation of $24.64 based on an industry average multiple of 17.6 and upon actually hitting the $1.40 EPS annual run rate next quarter. An argument for a premium valuation also exists since Tel is the only player in certain market segments with an automated TACAN bench test set. In other words, no competition in certain market segments with a high barrier to entry. Lastly, I challenge anyone in the micro-cap arena to present a more compelling short-term/long-term idea.
produced by an investor long in this company
About: Tel-Instrument Electronics Corp (TIK)
Summary
• Commercial launch of three multi-year contracts finally implemented after many delays.
• Fiscal Q4 guidance ending March 31st implies remarkable turnaround, but prior disclosures say the CEO is sandbagging.
• Tel just reported a 40% sequential increase in revenue, but says another 40% on top of that is on the way in Q1 and thereafter.
Tel-Instrument Electronics Corp. (NYSEMKT:TIK) is a rapidly growing and profitable $14 million dollar micro-cap that has finally implemented their commercial launch of three large multi-year military contracts for new Mode 5 Friend or Foe hardware. A lot has been learned since the publication of my Dec. 3rd Seeking Alpha "Pro" article that strengthens my extremely bullish thesis. I previously stated that Tel remained virtually unknown, which still holds true today, and investors should now be aware that company promises of greater revenue and profitability are finally here.
The company designs and manufactures avionics test and measurement instruments for commercial air transport, general aviation and government/military aerospace and defense markets worldwide. Tel provides instruments to test, measure, calibrate and repair a range of airborne navigation and communication equipment. Its products include AN/USM-708 and AN/USM-719, which are communications/navigation radio frequency avionics flight line testers; TS-4530, an identification Friend or Foe test set and AN/ARM-206, an intermediate level TACAN test set. Tel is the industry leader in developing and producing field-tested, rugged avionic flight line and bench test sets for demanding military and commercial customers. Based in East Rutherford, NJ, the company was founded in 1947 and has been providing avionic ramp and bench testers to both commercial and military customers for the last 35 years. Tel's historical design emphasis has been to provide the customer with user-friendly, rugged, reliable and affordable units. They also offer calibration and repair services. Tel sells its products directly and through distributors to commercial airline and general aviation businesses in the United States and through American export agents and overseas distributors.
Finances
Tel just reported their fiscal Q3 earnings that produced a surprising sequential 40% jump in revenues and Non-GAAP EPS of .09 cents. Tel also guided for fiscal Q4 revenue to increase 25% YOY and to exceed $5.6 million. While this increase is welcomed, it's also too conservative because of prior public disclosures by CEO Jeffrey O'Hara.
We know that in fiscal Q4 ending March 31st that the current three large contracts will produce approximately $5.3 million to go along with the T-47N IFF test sets for $600K and the routine $500K to $600K quarterly repairs, calibration and service work. On the low side we come to revenues of at least $6.4 million, which doesn't include any legacy or foreign orders.
I'm not quite clear why O'Hara would be so conservative, but it seems to me that after several disappointing false starts surrounding full rate production, O'Hara is relishing the opportunity to impactfully capture the market's attention in being able to blow away his own estimates that already reflect a remarkable and sustainable turnaround. Based off these public numbers, Tel would post a 42% increase in revenues YOY and EPS well over .25 cents.
Recent Company Highlights
Tel put out an eye-opening investor presentation in January that details an impressive backlog, increasing sales and higher margins. I sarcastically imply that maybe all of three people have read it due to my frustration with management not communicating with the market more often about their turnaround, although management has indicated that will change.
(click to enlarge)
Conference Call Highlights Included
A new Lockheed Martin F-35 contract is forthcoming soon.
R&D has several new products coming in the upcoming fiscal year.
Margins will steadily rise throughout the upcoming fiscal year.
CEO stated in conference call that he will pre-announce fiscal Q4 results in April.
Initial sales of commercial test sets to key China market.
CEO stated that expected revenue run rate to eclipse $7 million dollars a quarter commencing April 1st.
EPS Model Going Forward
I think O'Hara has made it quite clear where he sees Tel's revenues and net income going over the next few quarters and because the three multi-year contracts will afford very repeatable profitable quarters for a minimum of the next 2 years, let's look at my EPS model. Tel has a virtually fixed SG&A and R&D quarterly expense of $1.1 to $1.2 million since significant R&D expenditures for Mode 5 designs have been completed and fully expensed, but I'll use the higher number of the two.
For upcoming Q4 ending March 31st
With $6.4 million in revenues and 34% margins, that gets us to $2.17 million minus $1.2 million, or net income of $970K, and thus Non-GAAP EPS of .30 cents.
Remember, Tel just started utilizing Non-GAAP numbers to highlight the non-cash charges affecting EPS according to GAAP rules and past PR's have made it seem like the company lost money at first glance.
The Non-GAAP EPS is the true accurate representation of actual profits that Tel put in the bank for the quarter. Tel also has about $14 million in NOLS (Net Operating Loss carry forwards) offsetting tax expense for the next several years. When Tel achieves their $7 million a quarter run rate in fiscal Q1 along with higher margins, I see net income of $1.25 million, or EPS of .38 cents based on 35% margins that were explained in detail by O'Hara. Going back through Tel's filings, they historically hit 40% margins, so 35% maybe conservative.
For the full upcoming fiscal year, I am modeling revenues of $27 million (50% YOY increase) and Non-GAAP EPS of $1.40 a share, or 3X's forward earnings. This leaves a huge disconnect between where the stock is currently trading versus where it should be trading with these metrics at hand, but this will change when the company announces preliminary numbers next month.
Tel Instrument Insider Ownership And Share Structure
Another shareholder friendly consideration when conducting due diligence is the extremely high insider ownership of Tel's shares. Tel has just 3.22 million shares outstanding and per Tel's Schedule 14A filing, all officers and directors, including Sadie Fletcher (wife of deceased former Tel CEO), own over 1.6 million shares, plus long time shareholder Vincent Dowling owns 335K shares in his IRA accounts. Recent Form 4's indicate continued buying of expiring options and open market purchases, despite their already hefty ownership. Remember that old adage, people sell for many reasons, but buy for only one. Tel insiders have not sold any shares in years.
RISK vs. REWARD
As with any micro-cap company, especially one that trades so inconsistently volume wise like Tel Instruments with a small float of slightly over 1 million shares, it is not without risk. Tel has few Institutional holders and is rather illiquid at times. They also don't have the luxury of a lot of cash, although that is on course to change dramatically this year.
A 5-year chart above shows you that Tel spent several years in the $6 to $9 range at a time when the company was consistently losing money and prospects of profits were dim and delayed. Obviously, many threw in the towel out of frustration, but with Tel on the cusp of producing $1.40+ in EPS this calendar year and beyond, investors will soon realize that Tel is trading at 3X's forward earnings. In my many years of trading as a profession, this exact risk/reward setup has yet to fail me.
As I've made my investment case to several investors, TIK is unknown to most, but not for much longer, as April is just a few weeks away. At some point, investors should be able to buy into an argument for a future fair valuation of $24.64 based on an industry average multiple of 17.6 and upon actually hitting the $1.40 EPS annual run rate next quarter. An argument for a premium valuation also exists since Tel is the only player in certain market segments with an automated TACAN bench test set. In other words, no competition in certain market segments with a high barrier to entry. Lastly, I challenge anyone in the micro-cap arena to present a more compelling short-term/long-term idea.
produced by an investor long in this company
