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

Greenbackd is a value investing blog focused on “Identifying undervalued asset situations with a catalyst.”

From my own perspective, the importance of a catalyst is something I often overlook in many of these deep value situations, but it is an important factor in avoiding ‘value traps’ along the way to substainable long-term returns.

I was honored when I found out that my article on AMCON Distributing (DIT) was to be featured today.

Background

AMCON Distributing (DIT) is a micro-cap company with a market cap of only $34m and yet annual revenues of almost $1B.  This is an amazing relationship, and I would hazard a guess it’s one of the most lopsided market cap to sales ratios in the investing universe.

The company has made significant progress in the past two years in turning around the business financials and prospects, and has recorded two consecutive years of record sales, profits, and FCF.  2010 is shaping up to be another banner year.

The stock suffers from extremely low float, providing an opportunity for the individual investor to profit from its mispricing.

Read the full article over at Greenbackd.

Google Finance as well?

Also, I was a bit startled to find that my post was linked directly from Google Finance’s stock page for DIT!  See screenshot below:

Check out the bottom line!

Value Uncovered Portfolio

I’m adding DIT to my Value Uncovered portfolio at today’s closing price of $57.50.

Disclosure

Long DIT

Advant-E Corp (ADVC) is a tiny software company that has flown under the radar during 2010 despite outstanding financial performance and near term catalysts in the form of a special dividend.

The stock remains significantly undervalued at current prices.

Financial Highlights

ADVC reported a 6% improvement in second quarter revenues compared to the second quarter of 2009.

Net income also jumped by 28% in the quarter, due to a pickup in sales on the Merkur side of the business, along with strong cost controls across the board.

Merkur Group – Enterprise Software

The traditional software side of the business has struggled throughout the recession, posting revenue declines over the past several quarters. Impressively, the company has managed to squeak out a profit over that time period due to lower commission rates and cost controls.

The latest release shows the first glimpses of a turnaround for Merkur.

Quarterly revenues increased 2% from the same period last year, and 54% compared to the first quarter of 2010. This is an encouraging sign that ADVC’s customers are returning after pushing off purchases throughout 2008 and 2009.

Edict Systems – SaaS (Internet-Based)

The steady growth in the Edict Systems business has been amazing, considering the economic climate over the past 2-3 years.

Going back the past 14 quarters, this is the first quarter where the company didn’t produce sequential quarterly revenue increases:

The company has no debt and an unused $1.5m credit line. ROE and CROIC come in at 21.6% and 25.6% respectively, both outstanding.

Overall, the company reported record quarterly income, the 28th consecutive profitable quarter, and is on track for the highest FCF year in company history.

Special Dividend

In November 2009, the board of directors voted to approve a 10-for-1 stock split and corresponding special dividend of $0.03 per share, a 21% ROI based on the stock’s closing price at announcement.

The dividend would be paid in 3 quarterly installments due in December 2009, June 2010, and December 2010.

Although I missed out on the Dec ’09 dividend, $0.02 per share in dividends during the course of 2010 is an 11% return at current prices.

Valuation

Even with the near term catalyst and impressive financials, the stock is trading well below its normal multiples in a number of categories:

Current vs 5 yr Averages

P/E – 9.7 vs 13.7

P/B – 3.0 vs 3.8

P/Sales – 1.4 vs 1.9

Based on both DCF and EPV valuation methodology, ADVC should be trading closer to $0.30, providing substantial upside (and dividend) at its current price.

Conclusion

So, we have a stock that is paying a cash dividend, setting record net income & cash flow levels, increasing revenues each quarter during the worst economic downturn since the Great Depression, and yet is trading well below its 5 year averages?

Seems cheap to me – what do you think?

Disclosure

Long ADVC