5 Microcaps in 5 Minutes (#5)
I present five interesting Microcaps, worth a further look
Welcome to the 5th edition of 5 Microcaps in 5 Minutes. This format will remain free. If you want to get access to my full write-ups and updates of the stocks I own, you can do so, by becoming a paid subscriber.
If you're new, 5 Microcaps in 5 Minutes is a format where I highlight five interesting microcaps that I follow but don't usually own. I run a fairly concentrated portfolio, so the fact that I don't own them usually means nothing. In fact, the performance of some of the stocks has been very good. For example, BK Technologies BKTI 0.00%↑ is up 50% since it was profiled in May, while Strattec Security Corp STRT 0.00%↑ is up about 40% since then. On the other hand, Premier Health of America (PHA.V) is down 60% YTD - and was part of my picks in January. Also, part of the January picks was Sow Good SOWG 0.00%↑ - and it has been quite a ride for shareholders since then. With that in mind, let me give you the current five picks:
1. CULP - CULP 0.00%↑
Market Cap: $68 million
Share count: 12.49 million
P/E ‘24: N/A
When you come across a stock that is owned by one of the best microcap funds, Gate City Capital, you pay attention. If it is also owned by 22NW Funds, which also has a seat on the board, and both funds own together +20% - you should take the idea seriously. I did.
Culp is a mattress and upholster manufacturer in the United States. The company has been basically profitable throughout its history. Historically, because of the just-in-time production, mattresses manufactured in the U.S. were the preferred option.
Then, around 2018, Chinese-made mattresses entered the market with dumping prices. This was the first blow to American manufacturers like CULP. The next was the pull forward of demand during Covid and the subsequent drop in demand.
All this led to losses - and a share price near all-time lows for CULP. Now the company has announced a restructuring plan.
The company is currently trading below book value and with the announced changes should at least return to breakeven. However, to return to profitability, the industry would need to shift back to higher demand.
2. Air Industries Group AIRI 0.00%↑
Market Cap: $21 million
Share count: 3.34 million
P/E ‘24: N/A
Air Industries is a manufacturer of precision components and assemblies for the commercial and military aerospace industries. The company has made small profits in some years and small losses in others. Nothing really exciting.
Recently, however, they announced the largest contract in their history. A $110 million contract to be fulfilled over the next seven years. The aerospace industry is booming right now, and they are one of the beneficiaries. The question is how much of this contract will make it to the bottom line. Even before the contract was announced, the company was forecasting a much more profitable 2024 compared to 2023.
3. Q.E.P. Co., Inc - $QECP
Market Cap: $124 million
Share count: 3.40 million
P/E ‘24: ca. 8x
Q.E.P. is a manufacturer and distributor of flooring installation products. At the end of last year, they sold their loss-making and low-margin business in the UK and New Zealand. Now that the turnaround is complete, they are left with a cash rich balance sheet and a profitable business that generated $5.2 million in EBIT last quarter on a $124 market cap stock. With $30 million in cash, the stock looks pretty cheap on an EV/EBIT basis, but the question going forward will be what they do with the cash and whether they can use it to grow EPS.
In the past, they have grown mainly through acquisitions, and I would not be surprised if that is their main use of cash again. Unfortunately, their track record for acquisitions is not that strong, but with the son now at the helm, that may change. The family owns 49%, but they have paid out some of the sale via dividends.
4. Kewaunee Scientific Corporation KEQU 0.00%↑
Market Cap: $126 million
Share count: 2.84 million
P/E ‘24: ca. 10x
A similar story to QECP tells KEQU a company that manufactures, and installs laboratory, healthcare, and technical furniture. Last year, they stopped selling their products directly and focused on higher-margin sales channels.
“As discussed in previous quarterly releases, we are realizing the benefits from our strategic decision to stop selling direct which I announced in January 2022. Further, we continue to experience benefits from our focus on our continuous improvement and lean management programs, as well as the deployment of strategic capital across our domestic manufacturing facilities. I am extremely proud of our domestic Associates who continue to embrace a culture of operational excellence, delivering on our commitments to our customers.”
- Press release after Q1 results FY 2024
The result: While revenues declined by 7% in fiscal year 2024, operating income increased by a whopping 166%. They earned $4.40 per share. The current share price is around $41.
If they can now grow their revenues while maintaining or even improving their margins, there could be further upside.
5. VOXX International Corporation VOXX 0.00%↑
Market Cap: $130 million
Share count: 22.48 million
P/E ‘24: ca. N/A
There is a lot going on at VOXX. Well, it is basically a mess. When I first came across this company in July, it was trading at about 0.2x tangible book value. They make automotive and consumer electronics. Revenue and earnings got completely smashed after covid. But they emphasized that they want to sell the assets they own, including real estate and brands, and pay down their debt.
After selling assets for $53 million, eventually they announced strategic alternatives, and Gentex increased their position to 25%, buying shares for $5, when the stock was trading for $3 dollars.
Right now, it looks like Gentex has the intention of eventually buying the whole company. Given the still depressed share price and their open market purchases at $5, the downside seems protected, but as we all know these are microcaps, anything can happen.
Hi
It seems that yesterday at market close, KEQU published Q1'25 results in a press release, no 10-Q filed yet.
There is a YOY drop in revenues, income, ebitda. Management says that the main cause is "Site delays in India on multiple projects impacted our ability to ship products and deliver services leading to a slightly down quarter when compared to the prior year first quarter"
-> if true, that could be a temporary issue.
Backlog is increasing YoY and QoQ. I am throwing some initial thoughts, let's see what sticks :)
"The Company’s order backlog was $159.4 million on July 31, 2024, as compared to $140.8 million on July 31, 2023, and $155.6 million on April 30, 2024."
In the recent 10-K there is a comment "we estimate that not less than 88% of our order backlog at April 30, 2024 will be shipped during fiscal year 2025."
So, assuming 90% conversion of April 30, 2023 backlog of 140M = 126M in revenue. They had full year revenues of 203M, so ~75M in revenue not from backlog at April 30, 2023.
Extrapolating the 10-K numbers, 90% of 155.6M = 140M plus whatever revenue during the year not in backlog -> assume 75M as in last FY = 215M => +6% YoY revenue IF the delays in India do not affect backlog conversion/ during the year revenue generation, i.e. IF there is a catchup
That would put the company at 0.6x sales.
I would suspect some drop in shares due to weakening YOY numbers, but if India is indeed temporary _and_ resolves, all good?
Thanks!