Friday, October 16, 2015

Growth at CVV

CVD Corporation (CVV) is a $76M market cap company that manufactures equipment and delivers process solutions for various coatings.  They help take research products to production and sell coating equipment.  A few descriptions from their most recent 10-K:

We design and manufacture custom and standard state-of-the-art equipment and process solutions used to develop and manufacture materials and coatings for research and industrial applications with the focus onenabling tomorrow’s technologies TM. These coatings are used in numerous fields including but not limited to aerospace, medical, solar, nano and advanced electronic components. We offer a broad range of chemical vapor deposition, gas control and other equipment that is used by our customers to research, design and manufacture these materials or coatings for turbine blades, implants, semiconductors, solar cells, smart glass, carbon nanotubes, nanowires, LEDs, MEMS and other applications. Through our Application Laboratory, we provide process development support and process startup assistance.
Based on more than 32 years of experience, we use our engineering, manufacturing and process development to transform new applications into leading-edge manufacturing solutions. This enables university, research and industrial scientists at the cutting edge of technology to develop next generation aerospace, medical, solar, nano, LEDs, semiconductors and other electronic components. We also develop and manufacture research and production equipment based on our proprietary designs.
Our strategy is to target opportunities in the research and development and production equipment market, with a focus on higher-growth applications such as medical, aerospace, solar, smart glass, carbon nanotubes, nanowires, graphene, MEMS and LEDs. To expand our penetration into these growth markets, we have developed a line of proprietary standard products and custom systems. Historically, we manufactured products on a custom one-at-a-time basis to meet an individual customer’s specific research requirements. Our new proprietary systems leverage the technological expertise that we have developed through designing these custom systems onto a standardized basic core
The core competencies we have developed in equipment and software design, as well as in systems manufacturing and process solutions, are used to engineer our finished products and to accelerate the commercialization path of our customer base. Our proprietary-real-time, software allows for rapid configuration, and provides our customers with powerful tools to understand, optimize and repeatedly control their processes.

Let's start with inside ownership. Leonard Rosenbaum (age 69) founded the company in 1982 and has been CEO ever since.  Rosenbaum owns 13.3% of the outstanding shares while the board and executives as a group own 19.5%.  

Capital structure is clean with 6.1M shares of common outstanding, no warrants, and no preferred. All of the 3.5M long term debt is mortgage on their facility. 

The story with CVV is pretty simple: they are growing like crazy and the market hasn't priced it in. Below is a chart showing revenue and backlog over the past 5 years:

It looks like we have two periods of growth with something wrong in the middle.  What happened from the start of 2012 to middle of 2013?  Turns out there's a good reason for that big dip: expansion.  They moved from an old 63k sq ft facility into a new 120k sq ft facility, then added 10k to bring the total up to 130k sq ft.  They doubled in physical size.

The 2011 10-K mentions they closed on the new facility for $7.2M on Mar 16, 2012.  Let's see that chart again:

Now it looks much better.  We have strong growth followed by a necessary move for the future then getting right back to growth.  

While relocating the company purposely took on fewer orders.  The 2012 10-K explains the backlog drop "is directly attributable to the purposeful reduction in the amount of new orders accepted during this transition phase of moving to our new facility."  Likewise the decrease in revenue "is directly attributable to the reduction in the amount of new orders accepted during this transition phase as well as the disruption and inefficiencies in production from dismantling and reconstructing equipment during the year."  The 2013 10-K similarly explains the backlog drop "is directly attributable to the purposeful reduction in the amount of new orders accepted during the transition phase of moving to our new Central Islip, New York facility."  

Once settled into the new facility they turned back on the sales team and saw immediate results.  The 2013 10-K explains "Now that the move is complete we have resumed our full sales efforts. Since January 1, 2014, we have received approximately $16,312,000 in new orders."  And "revenue for the three months ended December 31, 2013 was approximately $4,880,000 compared to revenue of approximately $3,213,000 for the three months ended December 31, 2012, an increase of 51.9%, and a further indication that the distractions associated with the transition of moving into the new facility are behind us."

If you look at a chart of EPS you will see a huge dip in Nov 2014.  Other than that it follows the same basic shape we see above with revenue and backlog.  The big dip is due to settling some litigation brought by a former customer, Taiwan Glass.  This cost them $6.7M in 2014.  I don't know much about this litigation, seems Taiwan Glass was not happy with the equipment they bought from CVV.  

In Sept 2015 CVV settled their other outstanding litigation item by paying DSI $1M.  This is a good settlement in my view as DSI was seeking $6.9M.  

I don't know of any further litigation items.  

Conclusion and valuation:
We have a company growing quickly that has recently doubled their physical size so they should not need to expand further in the near future.  Since getting settled in at the new facility about 2 years ago their backlog has grown by 380% while revenue has grown by 120%.  They had similarly impressive growth prior to moving.  

The most recent quarter showed EPS of $0.21 = 71% YOY growth.  TTM revenue per share of $5.97 = 87% growth YOY.  Backlog of $19.3M = 33% growth YOY.  

Current share price is about $12.  So we're trading at about 2x TTM sales.  If we annualize the most recent quarter we get EPS = $0.84 for a PE of 14.3.  

Let's extrapolate out some numbers.  If things go as they have been since moving then we will have TTM revenue at around $10 per share next year and quarterly EPS at $0.35.  If we annualize that and keep a 14 PE then share price should be $19 or $20.  But if growth continues I'd expect the company to be worth a higher multiple.  

Why is it cheap:
If you look at the share price it looks to me like the pre-moving growth triggered a big upswing and the company is not getting the same treatment from the growth since moving.   I don't think the market has fully appreciated the fact growth was turned off and on at will by the company and they are now in a better position than they were 4 years ago with improved facilities.  

Disclosure: Long CVV

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