GeoNugget - Edac Technologies (NASDAQ:EDAC)

11/03/2011

GeoNuggets® - Quick Check List Highlighting Undiscovered Opportunities

Edac Technologies (NASDAQ:EDAC)

On October 26, 2011 we coded EDAC as a GeoSpecial @ $9.12

Company Description: Offers design and manufacturing services for the aerospace industry

Data Ended 11/02/2011

Fiscal Year End: December
Price = $9.97
Fully-Taxed Trailing EPS = $0.47
GeoInvesting Fully-Taxed 2011 EPS Estimate = $0.67
GeoInvesting projected near term growth rate= tbd
P/E based on Fully-Taxed Trailing EPS = 20.21
P/E based on Fully-Taxed 2011 EPS Estimate= 14.88

Criteria Check List

EDAC meets 7 out of 10 our most important GeoBargain® Requirements

	Requirement	Comments
	Recent 52-week High (generally within 3 months)	Recently broke out to a new high
	Strong EPS Growth Rate	As of 3rd Qtr 2011
Yes	>30% EPS Growth Rate	EPS increased 850%
	GeoPowerRanking (GPR); Number of consecutive quarters that we expect EPS to grow at least 30%. (20% may be acceptable under certain circumstances).	No estimates, but should be at least 2. Management commentary indicates that a GPR of 4 may be in the cards.
	>10% Revenue Growth	Revenue increased 18.0%. (As of 3rd Qtr 2011)
	Strong Operating Cash Flow and Balance Sheet	As of 3rd Qtr 2011
Yes	Positive Cash Flow	$ 3.5 Million for the 3rd Qtr. $ 3.1 Million through nine month 2011
No	Debt to Equity Ratio less than 20%	67%
Yes	Current Ratio is at least 2:1	2.2:1
Yes	Days in receivables < 90. This shows that the company converts its account receivables to cash within 90 days. (measure of liquidity)	72
	Return on Equity is at least 15%	Tracking at about 12.0% for 2011
	Minimum Pre-tax Operating Margins of 8%	6.8 % as of 3rd Qtr. 2011
	Preferably Under 50 Million Shares	5.3 Million shares as of 3rd Qtr. 2011
	High Insider Ownership (generally greater than 15%)	36.53% (Yahoo)
	Limited Institutional Ownership (generally less than 20%)	<20% (Yahoo)
	P/E Divided by Growth Rate (PEG Ratio) is Less Than 1.	Much less than one based on EPS growth in 2011, thus far

Additional factors to consider in analysis

Effective Internal Controls: Yes
Need to raise capital: tbd

Reasons for Optimism

The company has had difficulty growing quarterly EPS on a consistent basis. However, it appears as if the company has entered a new cycle of EPS growth. The company has now put together 3 consecutive quarters of EPS growth, the last two being well in excess of our minimum 30% requirement. All indications point to this trend continuing into at least the next two quarters.
Strong Backlog solidifies our assumption that near term EPS growth can be sustained and that it can continue well into 2012. Additionally, bullish commentary could translate into a blowout 2011 4th quarter, surpassing our 2011 year end EPS expectations.
- "Total sales backlog at October 1, 2011 was approximately $213.5 million, compared with $168 million at the end of the 2011 second quarter and $133.6 million at October 2, 2010. The higher backlog partially reflects several multi-year agreements announced earlier this year to produce components for commercial and military aircraft engine platforms."
- "We believe that our strong sales levels and increased profitability throughout the first three quarters of 2011 clearly demonstrate our potential to sustain and enhance our performance in the future."
- "We expect the 2011 fourth quarter to be the strongest period of the year in terms of sales, based on our backlog and the pattern of customer demand. Looking toward 2012, we expect to ramp up the delivery of engine components under some of our newer long-term agreements, putting the Company on track for another successful year."
- Per the 2011 3rd quarter conference call, a low margin project will be completed by the 2012 second quarter, freeing up capacity to produce higher margins products.
Industry seems to be holding up during uncertain economic times.
The company just turned cash flow positive in the 3rd quarter of 2011. P/E expansion could be in the cards if the company can reduce its debt to equity ratio to under 20%.
The stock's small float of just 3.2 million could lead to a sudden and sharp increase in its share price if momentum players stumble upon it.

Caveats:

Has had inconsistent EPS growth in the past;
Uncertainty regarding the timing of the realization of backlog into revenue;
Debt to equity ratio is well over our minimum requirement of 20% and could limit P/E expansion;
Customer concentration;
Risk of customer cancellations of backlog;
Military business could be at risk as the U.S. Congress addresses the country's debt level issues;
During the 2011 3rd quarter conference call the company commented that it expects the 4th quarter to be the strongest quarter of the year in terms of revenue. We had hoped that the company would have provided more color into 4th quarter margins. (although going forward, management did insinuate that current margins should hold).

GeoTeam overall subjective/confidence comfort level, on a scale of 1 to 10: Pertains to the ability of a company to achieve solid and consistent EPS growth over the next several quarters : 7

Potential Valuation Scenarios if the company can achieve its EPS growth goals (which we believe could be conservative)

Short-Term Potential value based on fully taxed adjusted trailing EPS

P/E 25 * $0.47 = $11.75

Short-term Potential value based on soon to be completed 2011 fully taxed adjusted EPS (estimate)

P/E 20 * $0.67 = $13.40
P/E 20 * $0.67 = $16.75

These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.