Orbit International’s operating leverage

Orbit International (ORBT) is a really interesting stock due to the company’s operating leverage, which I believe is not recognized by the market.

Mainly due to the United States budget sequestration in 2013 the company had to implement significant cost savings in order to return to profitability. One of the largest projects was a consolidation of two manufacturing facilities into one.

https://en.wikipedia.org/wiki/United_States_budget_sequestration_in_2013

Mitchell Binder, President and CEO of Orbit, commented, “We were driven to this decision by a number of factors, among them, a difficult business environment due to budgeting concerns in Washington, our broader focus on promoting operating efficiencies, and TDL’s expiring lease. This consolidation is expected to reduce excess capacity at our Hauppauge facility, provide the advantage of greater manufacturing capabilities offered by our ISO 9001:2008 operations, reduce labor and overhead costs, and boost margins, all while maintaining the world-class level of service that our customers have come to expect.”

Mr. Binder added, “After consolidation of these two facilities, our Hauppauge facility will have sufficient capacity to support future growth without any significant facility investment.”

Following the implemented cost savings, the company has returned to profitability. However, revenue is still low. Investor’s haven’t seen the effects of the new cost structure combined with higher revenues (yet). Incremental revenue, on top of 2016 revenue of 21m USD, is estimated to flow to the bottom line at 55-65%.

Although it is difficult to form a view on the likelihood of the company generating additional revenue over the next couple of years, I believe it is more likely than not. If the company can increase their revenue by 6-9m USD this will increase earnings by 0.90-1.35 USD / share. Shares currently trade at 4.30 USD. The downside seems well protected. The company has no long-term debt and I estimate new break-even revenue at ~17-18m USD, a level they have always exceeded over the last 10 years.

Year Revenue (m USD)
2007 26
2008 28
2009 27
2010 27
2011 31
2012 29
2013 25
2014 19
2015 20
2016 21
2017 More than 21

If the company manages to run at 100% utilization this will boost earnings per share by 1.35 USD

The company’s manufacturing facility ran at 70% utilization during 2016 (~21m USD in revenue). The company’s management believes that additional revenue can be served without additional overhead costs. They estimate that every additional dollar of revenue flows to the bottom line at 55-65%. If they manage to fill the available capacity, this will have a significant effect on earnings:

80% utilization: 21m USD/7 *1*60% = 8m USD –> 1.8m / 4m shares outstanding = 0.45 USD EPS growth

90% utilization: 21m USD/7 *2*60%= 6m USD –> 3.6m / 4m shares outstanding = 0.90 USD EPS growth

100% utilization: 21m USD/7 *3*60%= 4m USD –> 5.4m / 4m shares outstanding = 1.35 USD EPS growth

Revenue grow seems more likely than not

The company expects that there revenue in the 2nd half of this year will be better than the first half. They have good insight into quarterly revenues due to agreed delivery schedules with customers. So we may see some of the operating leverage effect in the next two quarterly reports. However, the real question is if they will be able to grow revenues significantly (3-9m USD).

It is very difficult to answer this question, but available information makes me believe it is more likely than not (at least a couple of million).

  • Tuck in acquisitions: the company is constantly looking for “tuck-in” acquisitions to make use of their available manufacturing capacity. So far without luck, which is probably price related. The company intends to pay 3.5-4 times EBITDA + earn-outs, which is low in the current M&A environment. In January the company was in talk with two potential targets, there has been no further news since then. I have no real expectations, but their persistence may pay off one time.
  • Oil price recovery: the power segment business heavily depends on the oil industry. Revenues have been lower due to the low oil price. If the oil price recovers and investments pick up in this sector, this may give a nice boost to revenue.
  • Historic revenue: Before the sequestration the company managed to do 25-30m USD annually in revenue.
  • Management optimism + share buybacks: Reading through all the press releases of the current management team, you can clearly see that their tone changed and that they are more optimistic that their revenue will increase. Both via organic growth and due to increased defense spending by the US government. That is also one of the reasons they continue to buy back shares. This year they have been very aggressive buying back shares reducing shares outstanding by 7.1% YTD (my estimate), which may increase to 9.8% if they can utilize the remaining funds in the buyback program.

ORBT1

ORBT2

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Please… sell me some more shares

When I invest in a company I want to make sure that I understand the company’s filings properly and that I have a good view on the sources I can use to obtain company information.

My mother tongue is Dutch, however the number of (interesting) companies trading on the Dutch stock exchanges is very limited. As a result I mostly invest in US securities. Which also have the advantage of clear reports which are easily accessible.

The disadvantage here is that my fellow investors, #competitor’s, also know their ways to find all relevant data and are part of probably the largest investment group in the world (investors who understand English). My investing edge has to come from better interpretation of available information rather than investigative work to find more information than the competition.

For US illiquid nano/micro-cap securities the disadvantages are limited from my experience. Hence, this is where I invest a large part my portfolio.

From time to time, when I can’t find anything interesting in the US, I start looking at securities on other exchanges. About two years ago I stumbled upon a very interesting liquidation play where my estimate of proceedings to investors was ~200% higher than the stock price with limited risks. It took me about a month to buy some shares. I think that the shares only trade 1 or 2 days per month. Bid/Ask spreads are often ~100% (Ask two times the Bid).

During the last two years unexpected uncertainties arose. About 50% of the company’s value became at risk. At this point I even tried to sell some shares at 50% of net asset value (NAV). Luckily for me it was impossible to do so. The Bid/Ask spread was 200% and all my sell orders were cancelled because they deviated too much from the Bid price. My broker couldn’t help it. Once you get into this stock, it is impossible to get out.

Recently the story de-risked tremendously. About 50% of the company’s net assets consists of cash at this time, which will be distributed to shareholders. The current bid is approximately 30% of the company’s NAV per share and the current ask is approximately 75% of the company’s NAV per share.

At this time my buy orders are also being cancelled as they deviate too much from the current Ask. Hopefully I will be able to buy more shares soon and share the idea on this blog.

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Telkonet ($TKOI), high growth, cash rich and nearing profitability in the IoT market

TKOI

Until recently Telkonet consisted of two business units:

  1. A high speed internet networking asset business unit
  2. Ecosmart – a business unit operating in the internet of things (IoT) market by providing both IoT devices and software to manage and save energy usage in all types of buildings

The high speed internet business was a business in slow decline generating nice amounts of cashflows. The company used these cashflows to invest in their Ecosmart business in order to stay relevant as a company in the long term.

The initial strategy of the company was to sell the first business unit once Ecosmart would reach profitability. However, recently they could divest the first business unit for a good price. Hence, the company decided to complete the divestiture earlier than planned and while Ecosmart is still unprofitable.

The company expects Ecosmart to be profitable by the end of the year. They expect to accelerate growth now they can fully focus on the Ecosmart business. The growth over the last couple of years has been lumpy but strong.

Recent significant insider buying in the stock by one of the directors sparked my interest. About half of the current market cap consists of cash. With only a couple of quarters of negative cashflow ahead of us (according to management) and good operating leverage, this seems like an interesting opportunity to buy a high growth company in a hot market at a cheap price.

TKOI - insider buying