For the uninitiated Micropac is a electronics manufacturing company located in Garland Texas. They develop electronics for the defense, aeronautics and space industries. You'll immediately notice their biggest customers are all government related. The company's products are split with 35% being custom designs and 65% being commodity designs. The company hopes that many custom designs will eventually become useful in creating new commodity designs, but it's far from certain that this will ever happen.
When I first wrote about them the company they were much more attractive. Earnings and margins were much higher than they are now, although NCAV was lower then. So in the past two years the company earned $.64 p/s last year, and $.18 p/s this past year. They've grown NCAV from $5.86 to $6.17. Here is the net-net worksheet:
The company is still selling for a discount to their NCAV, although with the recent earnings drop a solid argument could be made that maybe they're not worth NCAV.
The company is closely held with directors owning 76% of the company. This number is a bit misleading, there is one shareholder, a German industrialist who owns 75% of the shares. It's unclear what his relationship is to the company, but apparently years ago he spotted something he liked in Micropac and purchased most of the company.
The company's earnings fell due to lower sales volume in their high margin space related product. Without the higher margin items the company needs to boost their sales level if they want to bring earnings back to what they'd been in years past. The concerning aspect of this is that 65% of the company's sales are to the DoD and NASA, two organizations that aren't exactly experiencing a growth phase right now.
Most of the company's clients are defense contractors, meaning that Micropac's revenue will ebb and flow with government spending. As of this post it's mostly an ebb and not much of a flow, although that could change.
Even with reduced earnings the company is still profitable, although this past year there was some cash drain. The company ate into almost $1m worth of savings investing in plant, paying dividends, and letting receivables expand.
The good news is that Micropac has a backlog of $9m in orders that they expect to fill in 2013. This means they only need another $8m in new sales throughout the year to equal 2012's performance. If they can kick their sales team into high gear they could maybe notch revenue back up to the $20m plus range where earnings per share would be over $.50 again.
The investment case when Micropac was selling below NCAV with loads of cash and selling for a P/E of 8x was much easier to make than now. This past year the company has burned down some of their cash reserves and earnings fell off a cliff. They now have a P/E of 32x and a EV/EBIT multiple of 6.9x.
I'm re-evaluating what I want to do with my Micropac position. If earnings continue at the pace they were at for 2013 I would consider selling them at NCAV or NCAV plus PP&E. If earnings recover to the pace they were at over the past few years I would hold on for a sale price close to $10. So right now I'm just continuing to be patient, but I do have one finger on the trigger pending the next few quarters results.
Disclosure: Long Micropac