One of the many strategies I apply to gather intelligence on investment prospects is the dissection of company conference calls. Even though these calls are considered public information, many investors just don't have the time to look beyond a press release. I particularly like the instances when companies conduct interim conference calls between earnings releases, such as investor presentations that may offer insight not found anywhere else. This is a time to take advantage of newly acquired information while investors often become increasingly complacent and prefer to wait for earnings press releases to monitor company progress. I then look forward to selling my shares to less savvy investors at higher prices when the company reinforces bullish information in its ensuing earnings report. Subsequent to my initial mention of CPI Aerostructures ( CVU) on Feb. 5, 2010, I was eager to listen to an investor presentation replay that took place on Feb. 11. I hoped to attain a better grasp on my assumption that CVU, a structural aircarft parts provider for prime defense contractors, would report a stellar 2009 fourth quarter as well as gain some insights into the growth outlook heading into 2010. I have been on hundreds of conference calls, and I can say that this was one of the most bullish I have experienced. So much so, I added to my position. CEO Ed Fred was articulate and implied several times that his aggressive guidance for 2009, implying earnings of 63 cents per share to 69 cents per share and favorable long-term growth expectations, were still intact.
He strongly credits CPI's success to a renewed business model structured to secure more subcontracted work over primary government contracts. I found this particularly interesting since this is a similar strategy being used by Electronic Control Securities ( EKCS), another company I recently profiled. Unfortunately, the company did not provide specific 2010 guidance. I found this odd, because during the presentation the company expressed confidence that it may be able to achieve net income of $8 million in 2011 on $75 million in revenue. I am left to ponder what 2010 might look like. The uncertainty lies in the three-year compounded annual growth rate (CAGR) assumption CVU issued at the end of 2008: 50% to 60% for net income and 30% to 35% for revenue. Without getting too technical, the assumption does not imply consistency over the entire period, because the CAGR formula takes into account only beginning- and end-year periods. So, over three years, as long as the year three number implied by the formula is achieved, it doesn't matter what happens in the second year. Regardless, loaded with the ammo of 2011 expectations and a confirmation of a long-term growth forecast, I arrived at a best efforts 2010 EPS target of 96 cents. Analyst estimates are calling for 2010 EPS of $1.01. I urge investors to make their own assumptions and review information supplemental to the call. CVU plans to comment on 2010 guidance in its year end press release. Here are some additional key points from the presentation:
- There is long-term visibility thanks to the contract pipeline and an emphasis on acting as a subcontractor to defense contractors such as Lockheed Martin (LMT), Northrop Grumman (NOC) and Sikorsky Aircraft.
- Guidance does not include nearly $400 million of unawarded contract bids.
- Guidance does not account for the government's need to devote funds to repair damaged planes returning from Iraq.
- Guidance does not include upside from the CPI's current contracts.
- There is room for gross margin improvement of up to 35%.
- The company is happy with results and will continue to get better.