Streetwise

Lauren Rudd

Sunday, November 27, 2011

A Company To Go With Leftovers

In last week’s column, I wrote that each year about this time I offer up 12 investment ideas, the performance of which I then review a year later. The list is designed to be a catalyst to stimulate ideas and thinking on your part about possible sectors and companies you might want to investigate.

While I appreciate the interest and value many of you seem to place on the list, to those who requested a copy of the list in advance; you know that would not be fair or ethical. Even Diane, my better half, never knows what stock(s) will be talked about in a column prior to publication.

So continue with your own research and after the Thanksgiving holiday, in the first column of December, we will see how my picks of last year performed. At the same time, I will offer up another list of 12 companies for your investing pleasure.

Meanwhile, Thanksgiving dinner is but a pleasant memory and the world has officially kicked-off the holiday shopping season. Now I know what you are thinking...how about an investment idea to go with all that leftover turkey.

A company I often talk about this time of the year is Cubic Corporation (CUB). The company engages in the design and sale of defense electronic systems. It also designs and manufacturers fare collection systems for entities such as subway systems.

A year ago, the shares were trading at $44.47 per share. My earnings estimate for fiscal year 2010 was $2.63 per share and $2.86 for 2011 with a 12-month projected share price of $49. There was also a small indicated dividend yield of 0.40 percent.

So how did the company do? Earnings came in at $2.64 per share, or a penny better than I had forecasted. The difficulty of course is the share price, given the market’s volatility of late. The shares recently closed at $45.82 or about three percent above where they traded a year ago and of course below my projection.

Nonetheless, the company still posted record annual sales for its fiscal year ended September 30, 2010 of $1.194 billion, representing an increase of 17 percent over sales of $1.017 billion in 2009. Net income increased 27 percent to $70.6 million, or $2.64 per share, as compared to $55.7 million, or $2.08 per share, in 2009. Cash flows from operations were strong at $111.7 million.

Skipping ahead to the company’s fiscal third quarter ended June 30, 2011, net income was $20.8 million, or 78 cents a share, as compared with $22.7 million, or 85 cents a share, a year ago. Sales fell 3 percent to $319.9 million, while total backlog was $2.83 billion at June end. Operating income was $26.8 million for the third quarter as compared to $32.6 million a year ago. Cash flow from operations was $51.9 million in the quarter.

In the third quarter of 2010, the company had made a significant delivery of virtual small arms training systems, which resulted in a spike in quarterly sales and operating income. In the current year, the deliveries of these systems occurred throughout the year, resulting in sales and operating income more evenly spread across the quarters.

The third quarter last year also included a large fare system for a customer in Southern California, adding to sales and operating income for the quarter.

Looking at the nine month period ended June 30, 2011, sales increased to $938.3 million as compared to $846.5 million for the same period a year ago. Operating income was $82.0 million as compared to $79.1 million and net income increased from $57.4 million or $2.15 per share to $60.7 million or $2.27 per share. Cash flow from operations was $96.2 million for the nine-month period. Total backlog was $2.825 billion as of June 30, as compared to $2.486 billion as of September 30, 2010.

The intrinsic value of the shares using a discounted earnings model with a five year average earnings growth rate of 17.80 percent and a discount rate of 15 percent is $89 per share. The more conservative discounted free cash flow to the firm model offers up an intrinsic value of $74 per share.

I am raising my earnings estimate for fiscal 2011 to $3.00 per share and $3.35 for 2012 with a 12-month projected share price of $52.50 for a 15 percent gain. Again there is a small indicated dividend of 0.40 percent.