The company hasn’t issued a press release, but Techprecision (TPCS) submitted TWO pieces of major news this morning, via the SEC.
First, and most immediately important, the company renegotiated its debt with their lenders. I expressed no doubt that this would happen, but now it’s official… and considering that the lenders get an inside look at TPCS’s operations, the news is doubly bullish.
For the second piece of news, you can skip to the end or just continue reading. Either way, the shares have already started creeping up today. However, I believe today’s news justifies a much more substantial move. Here are the five things any interested investor needs to know…
#1 My original deep dive into TPCS, entitled TPCS Is Taking Flight (Don’t Miss The Boat), is still 100% relevant (and predicted much of what has transpired since) https://markgomesstocks.wordpress.com/2021/10/11/tpcs-is-taking-flight-dont-miss-the-boat/
#2 Gross margins at Ranor have skyrocketed to 39%. Gross margins at Stadco are -43.5%. Yes, negative forty-three-point-five. The reason is that a) they have just initiated some new projects… and margins are typically low or negative at the onset, as they ramp up b) factory utilization is CURRENTLY too low to support higher margins. FYI, Stadco gross margins have recently been around breakeven. The current number is temporary for the aforementioned reasons.
Let’s unpack that:
TPCS as a whole is on a $28M revenue run rate, with Ranor representing 67%. Based on the projects they’re working on (assembled via sources in the field, since the company CAN’T share that info), I see that going to $100M, with Stadco representing 50%, based on Ranor/Stadco projects, project sizes, and timelines (see #1).
Ranor went through a similar process, with gross margins moving from less than 9% in Dec 2019 to 39% last quarter. CEO Alex doesn’t sign up for unprofitable projects and Stadco has historically profited on the types of projects to which they’ve now pivoted (having completed & rid themselves of most of the unprofitable ones).
Stadco ramp up and go from -43.5% margins to +20% margins, giving the company total blended gross margins of 30%. On $100M of annual work, that’s $30M of gross margin on a business that doesn’t need to scale its sales, marketing, or G&A. They’ll drop close to $25M to the annual pre-tax line (close to $20M of net income). Oh… and they have $17M of NOLs, so the next $17M of operating income won’t be taxed. By the time they do, their remaining debt will be completely eliminated.
Give that a 15 P/E and you get $300M ($8.75 per share), making TPCS is a 6-bagger from here (assuming they don’t get acquired first).
Even a 10 P/E gives you a $200M market cap ($5.80 per share), making it a 4-bagger from here.
Not bad for a company with 10+ years of recurring business safely locked in ! #RecessionProof
#3 Don’t take my word for it. All you have to do is READ THEIR SEC DOCUMENTS!
This is from their 10-Q, which just came out on Thursday night:
“Ranor – The gross profit and gross margin significantly increased year over year with improved throughput on new orders of repeat components. This set of favorable conditions, accelerating project progress and better overhead absorption rates on higher revenue recognized over-time, began to take hold in the fourth quarter of fiscal 2022. We expect this trend to continue in fiscal 2023.
Stadco – The gross margin turned negative at the end of fiscal year 2022 and continued through the first quarter of fiscal 2023. New project startups and associated production activities resulted in unfavorable throughput and an increase in under-absorbed overhead. We expect gradual improvements in gross margin for the remainder of fiscal 2023 as the new projects make progress to completion.”
I think that’s pretty self-explanatory. Meanwhile, some people (who are presumably too lazy to read – LOL) continue to complain that the company doesn’t provide visibility into the business. From my view, as a close observer, that changed (to the extent to which it can) over a year ago.
#4 Those same people say that TPCS has underperformed their Defense Sector peers.
Well, for the record, I own shares in a couple of those peers (General Dynamics GD and Raytheon RTX). However, TPCS is my favorite of the three, by far. For the record, whether TPCS has underperformed its peers depends on the timeframe you use. They’re been an equal-performer from their last low to the current low, about 14 months. On anything between 3 years and 7 years, they’ve outperformed.
In my opinion, their underperformance on any other timeframe has been because of a) its status as a sub-$5 microcap on a lower exchange, which cannot be accumulated by most institutions and b) selling shareholders from the Stadco acquisition, which is near (if not at) completion.
As for its status as a sub-$5 microcap on a lower exchange…
#5 JUST ANNOUNCED THIS AM (!!) — The Company’s stockholders voted upon and approved an amendment to the Company’s certificate of incorporation to (i) effect a reverse stock split of the Company’s common stock at an exchange ratio between 1-for-2 and 1-for-5, such ratio to be determined by the Company’s board of directors, at any time prior to March 31, 2023, the implementation and timing of which shall be subject to the discretion of the Company’s board of directors and (ii) if and when the reverse stock split is effected, reduce the number of authorized shares of the Company’s common stock from 90,000,000 to 50,000,000 https://www.sec.gov/ix?doc=/Archives/edgar/data/0001328792/000110465922101034/tm2225997d1_8k.htm
They also renewed their debt facility, so the ONLY reason for the reverse split (as stated by Management) is to complete the final qualification for an up-listing. This will enable the company to be accumulated by more institutions, indexes, and ETF! FYI, illiquid microcaps that announce up-listings are favored targets of day traders, who routinely push stocks up 50%+ upon the announcement of a coming up-listing.
I submit that the 1) continued revenue growth, 2) continued upward movement in gross margins and 3) the resultant EPS ramp, along with 4) greater access/liquidity of the shares afforded by the up-listing and 5) the exhaustion of selling shareholders will result in tremendous share gains, far outperforming the sector and stock market at large.
Anyone who has traditionally doubted the company has had good reason, but the cards are now pretty much on the table for anyone willing to open their eyes.
FYI, see the chart below. Over the past several years, I’ve been pretty good/lucky at calling the ideal “Buy” points for TPCS stock. Today, I’m putting that track record to the test, by adding a new “Buy” marking on the chart.