TPCS Is Taking Flight (Don’t Miss The Boat)

As always, be sure to read my disclosures / disclaimers below. Most notably, I do not encourage or recommend for anyone to follow my lead on any stocks listed here or otherwise, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article. Cheers.

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In this article, I’ll present the results of an in-depth analysis of Techprecision (TPCS).

Those following my work on Aehr Test Systems (AEHR) have enjoyed a heck of a ride. The stock, which I picked at $3.23 less than 3 months ago, nearly hit $20 on Friday (Dec 2022 UPDATE: AEHR went on to make an all-time high of $28). This updated analysis on Techprecision represents my first deep dive since AEHR.

In short, I believe that shares of TPCS multiply over the near-term.

Let’s discuss why…

For starters, if you don’t remember the last time defense stocks were sexy, you’re not alone. The Cold War ended over 30 years ago. However, as most people know, tensions between China/Russia and the U.S. have been re-escalating in recent years. This comes at a time when Federal spending is set to resume its long-term trend of taking on a greater proportion of GDP, as you can see below:

Combine those two forces and it’s easy to understand why defense stocks have started to regain a luster they haven’t enjoyed since the end of the Cold War (around the time of my high school graduation, back in 1988).

In fact, in 2020, global military spending finally broke a 32-year old record, taking out the 1988 highs. This is due to the growing belief that we are now locked into a New Cold War. While that’s something we’d prefer not to see, it is what it is. All we can do is find ways to make the best of it.

Of course, buying defense stocks is the obvious answer. (Dec 2022 UPDATE: Defense stocks like GD and RTX have since gone to new all-time highs, despite the bear market).

To be clear, defense stock outperformance would be nothing new. Over the past two decades, the SPADE Defense Index has outperformed the S&P 500 by more than 120 percent. As we enter a new mega-cycle of defense spending, that outperformance is poised to move to a whole new level (especially with the major macro themes of Federal spending and geopolitical tension delivering heavy tailwinds to the sector).

Institutions on Wall Street have already taken notice.

As discussed in the article “Defense Stocks Could Head Back to Bull Market Highs”, large cap defense names have been on fire. Massive government orders have already been rolling in for the major general contractors.

But now, all that work is finally filtering down to subcontractors like Techprecision.

Techprecision is a leading manufacturer of complex, critical components and assemblies for the aerospace and defense industries. The company has played a vital role in the production of both submarines and helicopters, using its advanced manufacturing capabilities to produce high-quality, precision parts and systems for these sophisticated machines.

In the submarine manufacturing industry, Techprecision has a proven track record of delivering top-quality components and assemblies on time and within budget. The company has worked with some of the biggest names in the submarine industry, including General Dynamics Electric Boat, Huntington Ingalls Industries, and Navantia. Techprecision has produced a wide range of parts and systems for submarines, including hull and pressure vessel components, propellers, rudders, and control surfaces.

Techprecision’s expertise in producing high-precision parts and systems has also been invaluable in the helicopter manufacturing industry. The company has worked with leading helicopter manufacturers such as Bell Helicopter, Airbus, and Sikorsky to produce complex, critical components and assemblies for a variety of helicopter models. Techprecision has manufactured everything from structural components and airframe parts to cockpit controls and avionics systems for helicopters.

One of the key reasons for Techprecision’s success in both the submarine and helicopter manufacturing industries is its state-of-the-art manufacturing facilities and advanced machining capabilities. The company has invested heavily in the latest CNC machining and fabrication equipment, as well as in highly skilled and trained personnel, to ensure that it can produce high-quality parts and systems to exacting specifications.

Overall, Techprecision has established itself as a trusted and reliable partner for companies in the aerospace and defense industries, with a strong focus on quality, customer service, and innovation. The company’s contributions to the manufacturing of both submarines and helicopters have been significant and have helped to advance the capabilities and performance of these critical machines.

Of particular note, the U.S. submarine and helicopter fleets are officially in a refresh cycle. These cycles are rare, but last 10+ years when they occur.

Based on our knowledge of the opportunity, company capacity, and recent capex spending, this new purchasing cycle is poised to drive TPCS toward $100 million in revenue and 35% gross margins, with little need for increased SG&A. In other words, earnings should grow at a remarkable rate.

Indeed, I believe the coming years will see TPCS achieve over $20 million in net income (versus a current market cap of just $60 million). That’s a P/E of 3. To put that into perspective, its closest comp, BWX Technologies (BWXT) sports an enterprise value of nearly 20x Wall Street estimates for 2022 EPS.

That equates to $400 million (or $13.50 per share) for TPCS, which would be a near 7-bagger from current levels.

Of course, it’ll take a few years for them to get there, but we believe they have enough business on tap to justify a $7.50 price target. That’s 250% over its recent share price of $2.00.

Here’s how the TPCS opportunity breaks down…

As it pertains to submarines, the U.S. is locked in a fierce competition with China and Russia. Because of this, there is bipartisan support for accelerating submarine production (a rare area where Republicans and Democrats agree).

The original hope was for two submarines to be manufactured per year, benefiting Techprecision’s Ranor division to the tune of approximately $20 million per year, according to my research. But mid-September rhetoric makes it clear that the government is now leaning toward ordering AT LEAST THREE annually, including the super-sized Columbia-class subs, which bring in 50%+ more in per-unit revenue for TPCS.

In addition, Australia just (also mid-Sept) canceled its submarine partnership with France in favor of doing business with the U.S. It remains to be seen which domestic manufacturers will benefit from the Australian partnership, but sources have told me that the Ranor division almost surely will.

Either way, the over/under on submarine production has increased dramatically, from 2 annually to something closer to 4, representing $30 – 45 million in annual revenue… and that’s just submarines.

JAN 2023 UPDATE – The latest data suggests that TPCS is now providing about $10M of work per Virginia-class submarine and $20M per Columbia-class sub (and these numbers may actually be $5M too low). Seems incredible, but TPCS has been raising its share of these programs, from $300,000 initially to something closer to $7M as of 2013 to the numbers I’m providing in this update. This is a testament to their reliability as a trusted supplier to these programs.

As for revenue, the Government wants 30 Virginias and 10 Columbias between now and 2036. That works out to something on the order of $35-45M annually, an upgrade to the low-end of my prior numbers.

Ranor has also historically been a supplier to Mevion, a provider of proton beam machines. Proton beam therapy is increasingly seen as a more effective means of treating cancer than radiation. This was one of the reasons I originally bought the stock, several years ago when TPCS was awarded a $23 million per year contract to be the exclusive manufacturer of Mevion’s S250 Proton Therapy System.

Unfortunately, delays derailed this part of the story.

Well, don’t look now, but proton therapy is suddenly hot. If TPCS remains a supplier on these deals (I believe they are), investors may have to add $10 million to their annual revenue forecast. Add it all up, and we can expect to see $40 – 55 million in annual revenue for the Ranor division.

As it pertains to the Stadco division (click here to check out their website), TPCS CEO Alex Chen said it best:

“Stadco is a key supplier of large flight-critical components on several high-profile commercial and military aircraft programs, including military helicopters. Stadco has been a critical supplier to a blue-chip customer base that includes some of the largest OEMs and prime contractors in the defense and aerospace industries.

Stadco also provides tooling, customized molds, fixtures, jigs and dies used in the production of aircraft components. Some of Stadco’s largest orders run on multi-year based cycles. Stadco is presently finalizing the latest in a string of recurring long-term production contracts that will last through several years and provide a sound economic base upon which we believe we can grow the company.

For some of these contracts, Stadco is the most significant supplier, if not the actual or virtual sole supplier. Going to some high-profile programs here in the military sector, Lockheed Sikorsky CH-53K helicopter. Another one is the Boeing F-15EX, going on to Raytheon Hypersonic Missiles and Lockheed Advanced Aircraft.”

Of particular note, I have good reason to believe that TPCS is generating $750,000 per F-15EX. As for the CH-53K, the updated design represents a 15-year, $300 million contract (200 units at $1.5M per unit) for Stadco starting in 2022. “We are pretty much banking on this,” said Stadco COO Bob Parsi. “We foreseeably can double the size we are today by 2023-24 through this one program.”

According to CEO Chen, “has been a prime supplier of parts for the Sikorsky CH-53 helicopter for over 45 years, and continues to be a supplier of critical parts for the current CH-53E, as in Echo model, and the new CH-53K King Stallion heavy-lift helicopter.”

He went on to say, “This 200 aircraft order does not include an expected order from Israel to replace 20 to 25 of its aging helicopters with the CH-53K, as well as a possible order from Germany for up to 70, that’s 7-0, of the CH-53K helicopters. Production at Sikorsky is expected to increase to as many as 24 CH-53K helicopters per year over the next several years.”

This alone represents $36 million in annual revenue to Stadco.

(Dec 2022 UPDATE: The news from Dec 24th below says the U.S. Marine contract is going to exceed TWENTY units per year… and I hear TPCS’s revenue will be closer to $2M per unit. This DOUBLES my initial U.S. forecast above).

New US Marine Corps’ heavy helicopter reaches full-rate production

They also talked about building the largest structural component in the F-22. Sources believe they are doing the same for the F-15 and will receive $500,000-$750,000 per unit… and this is another market ramping up to 200-300 units of total demand. Thus, at the same annual delivery rate, this represents a $12-$18 million annual revenue opportunity.

Add an estimated $4-$10 million for miscellaneous projects and you get a grand total of $52 – $64 million in annual opportunity for the Stadco division. It should be noted that I believe Stadco would have to expand its capacity to achieve even the lower-end of this estimate. 

That being said, combining the Ranor and Stadco opportunity sets, I derive a total estimate of $92 – $119 million in annual revenue for TPCS… and that’s just from the programs into which I have visibility today. As revenue ramps towards my target range, the company will surely target new opportunities (if not new acquisitions) warranting upward revisions in my estimates (and of course, valuation targets).

JAN 2023 UPDATE – From what I’ve recently gathered, there’s reason to believe that TPCS can expand its capacity beyond my original $100M/year estimate without requiring new facilities. They would simply need more equipment and personnel.

This was timely information to gather, because Mevion’s S250 proton beam program appears to be gaining steam in the wake of the release of their new “S250 FIT” system. For those who don’t recall, TPCS was awarded a 5-year, $115 million exclusive contract to product important components of these systems. However, that didn’t materialize in the 5-year time frame (#WaitTime). However, it seems like that Wait Time is coming to an end and I believe TPCS may be generating upwards of $2 million at 40% gross margins per unit.

This is ADDITIVE to my estimate of TPCS’ total opportunity. Also additive is the opportunity to produce nuclear transport casks in the anticipated event that nuclear starts to become a bigger part of America’s strategy for moving away from fossil fuels (which things like solar and wind are NOT keeping up with). IF that materializes, the U.S. has about 500 casks outstanding that were old back in 2013… and I believe each one would bring over $1M in revenue (per cask) to TPCS.

Netting it all out, I see the need to upgrade my assessment of TPCS’ opportunity from $119M annually to something on the order of $150 million annually. At that level, the company could produce well over $1 per share of EPS.

To repeat what was said earlier, these programs should trend TPCS toward $100 million in revenue and 35% gross margins, with little need for increased SG&A.

This will see TPCS achieve over $20 million in net income (versus a current market cap of just $60 million). That’s a P/E of 3. To put that into perspective, its closest comp, BWX Technologies (BWXT) sports an enterprise value of nearly 20x Wall Street estimates for 2022 EPS.

That equates to $400 million (or $13.50 per share) for TPCS, which would be a near 7-bagger from current levels.

CONCLUSIONS

The U.S. / global ramp in submarine and aircraft orders has already been underway for several quarters. The visibility into TPCS’ haul hasn’t been as transparent as the semiconductor testing equipment ramp has been for AEHR. However, that doesn’t make it any less real.

TPCS, and the newly-acquired Stadco, are both THE preeminent (and in many cases, sole-source) suppliers for several components that go into submarines and aircraft.

Beyond this, TPCS has VERY little competition due to 1) the highly precise nature of the components they produce, 2) the lack of ordering activity over the past decade, and 3) the need for clearance to do U.S. military work.

In other words, TPCS/Stadco’s services are absolutely required for the tasks at hand.

Further, based on the company’s recent actions and U.S. military needs, there’s no question that TPCS is on the receiving end of a fast-ramping array of business that is being doled out, ensuring a decade-long cycle of prosperity for the company.

The bottom line is this… the military purchasing cycle has been at a low for some time. This has led to lean years for TPCS (and almost bankruptcy, back in 2015). Consequently, the stock has not made a new all-time high since 2007.

However, the long-term picture (and chart) has been coiling since 2019. COVID delayed the ramp, but the floodgates are finally open, with bipartisan support for significant increases in military spending to shore up the country’s defenses and economy.

Catalysts have only started to emerge. Submarine and helicopter orders manifest in rising backlog (which precedes revenue), something that has started to show up in TPCS’ quarterly results.

Further, quarterly earnings comps are going to be extremely favorable for at least the next four quarters due to the acquisition of Stadco. Year over year growth rates could exceed 100% in one or more of the next few quarters, making for some catalytic earnings headlines.

All this is happening at a time when management is finally changing its historically investor unfriendly ways. Our contacts indicate that this change is being driven by several constituents, which may include its large investors, investment banker(s), and Board of Directors.

The proof is in the pudding. The Stadco M&A announcement was perhaps the most bullish and transparent press release we have seen in the Alex Chen era… and the company followed it up with the most bullish conference call I’ve heard in the 10 years I’ve been following the company.

In short, the wait time is over. The Gold Mine is open for business and the potential upside is significant. On the flip side, there is very little downside risk.

CEO Alex Chen is best known for his ability to turn companies around. His efforts pulled the company from the abyss and enabled TPCS to rebound from a $0.05 low in 2015 to its current levels. This is significant because its new acquisition, Stadco, is in a similar condition as TPCS was when Alex took over.

There’s one major exception, though. STADCO instantly benefits from the fact that its new parent (TPCS) is a healthy and viable organization. This is giving customers confidence in its ability to stay in business (and therefore deliver on orders).

This is important because TPCS paid just 25% of its market cap for Stadco (despite the fact that Stadco’s opportunity is at least as large as that of its parent).

In other words, the acquisition instantly ADDED about $1 per share of value to TPCS (something that is only starting to be reflected in its share price), contributing to a minimal risk profile vs. its multi-bagger prospects for capital gain.

Cheers

p.s. When the stock was completely out of favor (not long ago), the following was written by a member of my research community:

“With days that offer stocks with double digit returns it is easy to be frustrated with this stock. I’ll offer why I remain patient.

TPCS has two significant demand drivers in front of them. First, Virginia class submarines and more specifically the Virginia Payload Module being added into Block V. This block is 10 boats but work is still only being done on the first two (and the first boat did not have a VPM). There are two Blocks of 5 boats each expected to follow. Second, Colombia Class- this program is for 12 SSBNs and represents a doubling of overall demand compared to the Virginia Class program.

At present almost all work has been towards the lead boat with a bit of advanced procurement on the second boat.

TPCS has taken on new part numbers. Though there has been poor profitability on these new products TPCS has proven their ability to produce these parts and expressed confidence in producing these parts profitably the next time through.

Winning new part numbers puts them in a difficult to replace incumbent position as these programs continue over the next two decades.

Much of the overall poor performance is due to factors outside of their control – delays in congressional approval, delays in funding appropriations from the primes, the welding issues at BWXT and of course Covid related delays impacting the entire supply chain.

I expect Alex to say that the magnitude of their opportunities ($75-100mm) remain in front of them and certainly we need to see a further uptick in the backlog to validate this thesis. Making a quarterly profit would be good as well ; ).

And of course the resolution of Stadco… but I am hoping this perspective helps those struggling with this one.”

Those sentiments echo my own when it comes to winners before they become winners.

Being pack animals by nature, most investors tend to be skeptical until a large enough group of  investors jumps on the bandwagon.

But you can’t earn extraordinary returns by doing what ordinary people do. My success and reputation has been built on the willingness to believe what I see with my own eyes, in the present, even if those around me opt to hold on to their memories of the past.

Personally, I chose to become rich over being a part of the pack…

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