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

Electronic Systems Technology, Inc. (ELST) reported third quarter results last week, with significant improvements in revenue, operating income, and EPS.

2008 and 2009 were rough years for ELST, but recent trends show a return to former operating levels.

Truthfully, the stock is boring, but the company continues to trade at a discount to its net asset or liquidation value, providing a solid margin of safety.

Financial Information

Total revenues for the third quarter improved to $588k compared to $379k in the same quarter last year, an increase of 55%. Surprisingly, most of this growth was generated on the domestic sales side (in the first quarter, growth was seen mostly in the foreign markets).

Domestic sales made up 91% of quarterly revenues. While this sales growth is positive for ELST’s core markets, domestic sales have much lower margins than the international business.

Year-to-date sales of $1.6m are 20% higher than the same time last year, with growth increasing quarter over quarter.

The company reported positive quarterly net income, bringing YTD profits up to $102k or $0.02 per share.

A good portion of this yearly increase can be attributed to mobile data computer systems (MDCS) to public and government entities. For the first time, the company disclosed a material customer, ACL Computers & Software, which is a government subcontractor.

ELST’s products have long been used in patrol cars for police forces, and it appears the company is expanding into the federal space, a positive development.

The balance sheet remains strong, with a current ratio of 23.9. A significant portion of the company’s assets are in cash or short-term certificates of deposits.

Valuation Scenarios

At the latest closing price of $0.54, the stock is still selling at a small discount to NCAV and only slightly above NNWC.

Enterprise value is actually negative, as the company’s cash balance is more than the current market cap.

As a going concern, the company should report full year EPS of approx $0.03, with owner earnings of $200k.

Assuming no growth going forward, this still yields a DCF value of approx. $0.62 per share.

Conclusion

Now that sales are picking up, I’d like to see management return some of the excess cash to shareholders.

The company paid a consistent dividend from 2005-2008 when the business was in similar financial shape, and the resumption of this practice would be a good start.

Although government sales are notoriously unpredictable, another possible catalyst could arise through this new federal government reseller. Even a small federal contract could significantly help a company like ELST.

Overall, this is a pretty boring stock where future gains are limited but with solid downside protection. I’ll be keeping a close eye on an opportunity to sell if the price jumps significantly above the current asset value.

Disclosure

Long ELST

AMCON Distributing, Inc. (DIT) possess a market cap of only $40m, yet just passed the $1B mark in total revenues for fiscal 2010, a significant achievement.

After reporting full year results, the company has significantly improved its financial position and is poised for another solid year in 2011.

2010 Year in Review

DIT hit several key milestones during fiscal 2010:

• Acquired Discount Distributors, a wholesale distributor based out of Arkansas with annual sales of $59.6m. The acquisition occurred in November 2009, so most of this annual run rate is included in 2010 results.

• Opened a new retail food store in Tulsa, Oklahoma. The company is expanding cautiously, and this new store brings the total count to 14.

• Reduced total borrowings under the credit facility by more than $4m, even after the opening of a new store and a decent-sized acquisition.

• Grew net sales, operating profits, earnings per share, and dividends to the highest on company record.

Financial Information

The company operates in two reporting segments, wholesale distribution and retail foods. For the year, total sales increased 11.3% to $1.01B.

Wholesale distribution saw a significant jump in revenues, largely driven by the new acquisition and higher cigarette prices that were passed along to AMCON’s customers – overall cigarette carton sales were down.

Retail foods revenues were basically flat, but gross margins increased from 41.8% in 2009 to 43.8% this year.

As a whole, the higher revenues and lower margins managed to cancel each other out, and operating income remained relatively flat at $15.4M.

However, income from continuing operations increased 5.6% to $9M, due to the lower interest expense (as the company continues to pay down its long-term debt) and tax burden.

On an unadjusted basis, diluted EPS was $11.99 compared to $16.61 last year – however, last year’s numbers were boosted significantly by the sale of AMCON’s water business, a sale classified under discontinued operations.

After normalizing for this one-time event, earnings per share actually rose 10% from the prior year.

Balance Sheet and Efficiency

AMCON continues to generate solid cash flow from operations, and has put the cash to good use – smart acquisitions, cautious store expansion, and debt repayment.

Debt to equity has fallen to 181%, down from a high of 1590% (!) back in 2007. The company’s current ratio now sits at a respectable 2.5.

CROIC is a very solid 16.9%.

Compare these other efficiency ratios to DIT’s key competitor: Core-Mark Holding Company (CORE)

Valuation

The stock has appreciated more than 20% since my original article on this turnaround story, but remains undervalued at current levels.

EV/EBITDA is 4.42 – applying a normal multiple of 6 would translate into a share price of $102.

Conclusion

Management has done a great job of turning around the company over the last several years.

AMCON runs a very lean operation, so net margins probably won’t rise much above 1% overall as long as the majority of the business is driven from the distribution side.

Management has already taken the obvious improvement steps, so growth will be largely from smart acquisitions and well-designed expansion on the retail side.

Last year, the Series C preferred stock was converted into common shares and retired – the majority of the remaining preferred shares are owned by current management so the risk of dilution is small.

Although unglamorous, AMCON’s business is unlikely to go away:

“With over 144,000 locations at the end of the 2009 calendar year, convenience stores outnumbered all other competing sales channels (supermarkets, drug stores, tobacco outlets, and mass merchant/dollar stores) combined, and have become a destination of choice for time-starved customers. Additionally, because convenience stores dominate a number of product categories, they have become an unavoidable part of day-to-day life for many Americans”

Business remains steady throughout the business cycle, in good times and bad:

“our businesses have remained more resilient than many other distribution and retail formats and have performed comparatively well given the challenging operating environment.

While the stock isn’t as cheap as before, it has plenty of upside left.

Disclosure

Long DIT