Friday, November 16, 2018

CVV is too Cheap to Ignore

I first wrote about CVD Equipment Corporation (CVV) three years ago in Oct 2015 with the stock at $12.25.  That's a very high price for me and it has not worked out.  If given another chance I would not have bought at that price but what can you do.

The stock has now slid all the way down to $4.29 and it's a buy here for sure.  Recently I've been buying more and I may continue.  With tax loss season upon us this may very well get cheaper but it's got to be worth a double at least.

I encourage you to read my original CVV blog post.

Current Numbers and Real Estate:

Let's go through numbers then you decide if it's worth reading further.
  • TTM sales: $29.4M
  • TTM net income: -$1.69M
  • BV: $38.1M
    • cash: $14.2M
  • no preferred or warrants
  • shares common: 6.50M
  • stock price: $4.29 
    • market cap: $27.89M
The company is currently trading at 73% of book value and the amazing thing is how tangible this BV is.  CVV has $14.2M in cash and about $10M in real estate.  At the current stock price you get the company for free.  

The company owns 3 buildings.  On the most recent conference call the CEO said he thought he could sell the buildings for at least what he paid.  
  • 555 North Research Place, Central Islip, NY 11722
    • CVV bought this building in Oct 2017 for $13.85M and has $10.1M left on the mortgage
  • 355 South Technology Drive, Central Islip, NY 11722
    • CVV bought this building in March 2012 for $7.2M and has $2.7M left on the mortgage
  • 1117 Kings Highway, Saugerties, NY 12477
    • CVV bought this building in Dec 1998 for $1.4M and it's paid off
Based solely on these numbers I'd go with a value of ~$50M giving a stock price around $8.  Just thinking about revenue, cash, and real estate.  

Acquisitions and Growth:
The main thing CVV has done since my last blog post is expand into new areas.  They are not sitting tight with current operations.  They generate cash and put it work.  

In Dec 2016 they acquired Tantaline A/S of Nordborg, Denmark then a month later announced plans to expand in the US.  In Nov 2017 they acquired MesoScribe Technologies in NY.  And in Dec 2017 they closed on the purchase of a new building in NY to house the Tantaline and MesoScribe expansions.  Right now they are working on upgrades for the new building and plan to sub-lease out the extra space once completed.  

These are the actions of a company looking to grow and I like it.  You can't have stock movement without some sort of change and CVV is going for it.  

This brings out the downside of CVV and the reason I think the stock has suffered.  Their performance is extremely lumpy.  Here's revenue for the past 4 years: $28M-$39M-$21M-$41M and I think this year they're on track for maybe $30M.  The stock is down 65% in the past year yet their most recent 10K press release highlights the "most successful annual financial results in its 35 year history" with 96% YOY revenue growth and $0.82 EPS.  It was only June 2016 when CVV announced a $30M order!  But we all know the stock market looks forward and people like predictability.  CVV has seen the backlog drop and it's hard to say what orders will materialize a year from now.  So as we see expansion and opportunity in one hand we have construction issues and delayed orders in the other.  CVV says next Q will be similar to the latest and they hope to ramp up with the new facility in Q2 2019. 

In my previous blog post I talked about their business being interrupted by a move into a new facility and history is repeating itself.  The 10Q press release two days ago notes, "an exceptionally long permitting process for the build-out of our new CVD Materials production facility".  Here we have a new acquisition and plan to expand knocked off course by hiccups in the process.  Any Phil Fisher fans out there will recognize this as his preferred entry point.  

The company knows and are trying to improve.  But for now I expect them to continue with these wild revenue swings and expansion interruptions.  Some CEO quotes from the most recent conference call
The third quarter was a challenging one for CVD as a number of events caused our results to fall short of expectations. The substantial completion of our large aerospace orders in the second quarter and delays in placing orders by a number of key customers for a variety of reasons impacted our results.

Also impacting our results this quarter were the additional expenses in carrying costs associated with delays in the permitting process for the construction of our new 180,000 square foot materials production.

One of the main reasons for developing the materials business is to diversify CVD's customer base and reduce the lumpiness of our equipment business. The other reason of course, is to tap into new growth markets of supplying material codings for aerospace, biomedical and corrosion resistant applications.
Just look at this revenue.  On the whole it is increasing and CVV is clearly growing.  You see the trend.  But YOY comparisons get crazy with large jumps up in either direction.  The real question is where you think we'll be in 5 or 10 years.


Here are the 1, 5, and 10 year stock charts.  Clearly CVV has been punished for the delays and uncertainty.  We have to go 9 years back to find current the support area.  Ouch.



Business:
Time to talk about what the company does.  As you can tell by this post I usually look at the chart, numbers, and situation before thinking about the business.  Priorities

The company makes coating equipment.  They license technology, sell product, help companies develop production facilities.  It all sounds very high tech and ground breaking.  They do a lot of R&D and move into new areas.  You can see lots of impressive looking stuff on their website here.  

Some quotes from the most recent 10K and conference call:
we recently filed a number of key provisional patents for corrosion resistant coatings, and a family of novel fluid reactors that allow the efficient transfer of gases towards out of liquids. One potential application of fluid reactors is in oxygenation cartridges used during cardiopulmonary bypass surgery to add oxygen and remove carbon dioxide from the blood.

Our MesoScribe business was notified that they were selected to receive three government-sponsored awards for the development of the Direct Write technology

Last month we were among select number of companies to present at the U.S. Air Force CMC Technology Interchange Meeting. This invitation reinforces our confidence in being recognized for our ability to provide innovative solutions to new and existing markets. This is one of the many reasons CVD will continue to make significant investments in our next-generation solutions and materials. These investments will position CVD for long-term success.

We design, develop and manufacture a broad range of chemical vapor deposition, gas control and other state-of-the-art equipment and process solutions used to develop and manufacture materials and coatings for research and industrial applications. This equipment is used by our customers to research, design, and manufacture these materials or coatings for aerospace engine components, medical implants, semiconductors, solar cells, smart glass, carbon nanotubes, nanowires, LEDs, MEMS and other applications. Through CVD Materials and our Application Laboratory, we provide material coatings, process development support and process startup assistance with the focus on enabling tomorrow ’s technologies TM .

We develop, manufacture and provide equipment for research and production based on our proprietary designs. We have built a significant library of design expertise, know-how and innovative solutions to assist our customers in developing these intricate processes and to accelerate their commercialization.

Our strategy is to target opportunities in the research and development and production equipment market, with a focus on higher-growth applications such as aerospace, medical, solar, smart glass, carbon nanotubes, nanowires, graphene, MEMS and LEDs.

the proprietary MesoPlasma™ technology complements our Tantaline® business which we acquired in Q4 2016. The two technologies when combined provide a treatment and coating which provides both corrosion resistance and now wear resistance. This is consistent with our strategic plan to leverage our equipment know-how, business infrastructure and proven ability to scale up new technologies, all offering high value-added materials, products, and services and is another step in our combined organic and acquisition growth strategy.
Conclusion:
Look back at that revenue graph and think to yourself where it is likely to go.  Sure looks like a long term up trend to me.  We have a cutting edge business that's been around for 35 years.  They are expanding and moving into new, complimentary areas.  They have a wonderful balance sheet and finance everything with profits.  They are fiscally responsible.  The CEO has been in charge since founding the company in 1982 and he owns 13% of the common.  There is no dilution.  This is a bargain.  

I don't know what will happen or where the stock will go.  Here's what I think.  We have stock support around $4 and will sit here for a while.  One day they'll announce a big contract and the stock will move big time.  At some point we'll have revenue materially higher than current levels and the stock will be in the teens.  It's hard to imagine a scenario where this stock stays at $4 over a prolonged period of time.  

--Dan
disclosure: long CVV

12 comments:

  1. They also have hilarious Q&As in the conference calls - hitmen and all

    https://seekingalpha.com/article/4222315-cvd-equipment-corporation-cvv-ceo-len-rosenbaum-q3-2018-results-earnings-call-transcript

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    1. Lol, just looked that up. Priceless!


      Great write up as always Dan, I think the few paragraphs in your conclusion sums up the investment proposition perfectly. As you've pointed out many times before movements in stocks are all about perception, assuming these positive business developements continue it seems unreasonable to assume that CVV won't move to the upside as the perception of market participants towards the stock begins to improve in line with the fundamentals.













































































































































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  2. Don't you think this is a melting ice cube? Every year the negative earnings are eating into your margin of saftey found in BV.

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    1. CVV earned $5.26M last year. Earnings over the past 10 years, starting from the most recent, are as follows: $5.26M, -0.15M, 3.2M, -2.47M, -0.56M, 0.44M, 3.78M, 0.53M, 0.18M, 0.63M. That's a total of $10.84M earned in the past decade. 7 of the past 10 years with positive earnings.

      This is not what I would call negative earnings "every year"

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  3. Dan, thanks for the write-up. My concern on this one is that if you put any 10 yr graph of a semiconductor related company up there, sales would look the same, if not better. Obviously this is a cyclical industries but due to the hot economic recovery, the cycle has lasted quite some time now. Once that cycle turns, my guess is that it would be very, very bad for this company. I do think that you have nice downside protection with the cash + properties, though I'm not sure the value from the properties would ever be realized. There's always a chance with a company like this that they strike gold with a new breakthrough technology or huge contract, though I like to view those types of unknowns as free call options. I think more consideration should be given to how this is tied to cyclicals.

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  4. I would be worried about the fact that one customer makes 66 percent of revenue.

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    1. Yeah this goes along with the general lumpiness. They just completed the huge $30M order

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  5. If you are looking for a good value you're better off in ELSE (Electro-Sensors).
    ELSE has much better gross margins, 8M cash, no debt and owns its corporate headquarters.
    CVV TTM sales is misleading as 1 large customer order is now complete. New annual sales run rate on CVV is $10-16M.

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  6. Dan is long CVV. Hmmm. Obvious he hopes the stock will go up. Okay, maybe they will get some good contracts soon. Maybe not! I'm not impressed. CVV is not convincing me that it is worth it's current market cap.

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  7. Thanks for the write-up Dan, interesting company!

    > There is no dilution.

    Looking back further, there has been some dilution around 2008 and 2011: https://fairlyvalued.com/company/cvv, second-last chart. Not terrible imo, still an interesting opportunity.

    > Dan is long CVV. Hmmm. Obvious he hopes the stock will go up.

    I'm pretty sure he's long _because_ he thinks the stock will go up, not the other way around ;-)

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    1. Thanks for the correction on my no dilution line. I shouldn’t have written it like that.

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  8. Impressive sounding press release about a potential new market today. Goes along with a patent application

    https://www.cvdequipment.com/2018/11/26/cvd-develops-advanced-fluid-reactors/

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