I’ll admit, I wasn’t feeling too well about my investment in Astrotech (ASTC) around this time last week. A delayed 10-K is almost never a good sign and the stock’s recent slide spun me into a heightened state of paranoia that something nefarious was going on.
So no one was surprised as me when Astrotech finally reported its fourth quarter results: net income of $2.2 million, or $0.11 per diluted share on revenue of $9.2 million compared with a fourth quarter fiscal year 2012 net loss of $1.3 million, or $(0.07) per diluted share on revenue of $7.6 million.
Not bad for a stock that closed at $0.67 the day before.
Needless to say, the market reacted swiftly, bidding the stock to a high of $1.23 before closing the day just below $1. Normally, I would sell into such strength, but because I know the story behind this company, I’m actually buying more.
What most casual observers don’t notice is that there are really two main businesses with Astrotech. One that makes money (satellite processing) and one that takes money (1st Detect). The satellite processing division could likely be managed by a Golden Retriever of average intelligence. It is stable income with contracts that stretch out decades into the future. Its facilities and real estate alone are worth significantly more than the entire company’s market cap. This division makes up literally all of the company’s revenue and subsidizes the development of 1st Detect.
The satellite processing division’s financials are shown below.
(In thousands) 2013 2012 Variance
Revenue $ 23,862 $ 25,817 $ (1,955)
Cost of revenue 15,684 18,748 (3,064)
Gross profit 8,178 7,069 1,109
Gross margin percentage 34 % 27 % 7 %
Operating expenses
Selling, general and administrative 4,865 5,008 (143)
Total operating expenses 4,865 5,008 (143)
Interest and other expense, net (192) (1,022) 830
Net income 3,121 1,039 2,082
Less: net loss attributable to noncontrolling interest - - -
Net income attributable to ASO $ 3,121 $ 1,039 $ 2,082
As you can see, this division was profitable in each of the last two years and became more so in 2013 due to a healthy increase in gross margins. I’ll retract my earlier statement about being managed by a Golden Retriever of average intelligence.
If Astrotech had only this one division, the company would show consistent yearly profits and the stock price would probably be a multiple of where it is today. When we look at the financials for 1st Detect, it’s apparent where all the profits are going.
(In thousands) 2013 2012 Variance
Revenue $ 133 $ 321 $ (188)
Cost of Revenue - 41 (41)
Gross profit (loss) 133 280 (147)
Gross margin percentage 100 % 87 % 13 %
Operating expenses
Selling, general and administrative 1,925 2,059 (134)
Research and development 2,080 2,571 (491)
Total operating expenses 4,005 4,630 (625)
Interest and other expense, net 28 (4) 32
Income tax expense - (17) 17
Net loss (3,844) (4,371) 527
Less: net loss attributable to noncontrolling interest (538) (620) 82
Net loss attributable to Spacetech $ (3,306) $ (3,751) $ 445
I’m not saying 1st Detect is a bad business decision. In fact, I think it’s quite the opposite. You have to spend money to make money. Unfortunately, the market is not even valuing it at zero, it’s valuing it as a liability considering tangible book value for the entire company is $1.70 per share. This is a huge market mispricing in my opinion. The technology for 1st Detect’s miniature mass spectrometer is seemingly very good as it’s currently being used by NASA. It seems things may finally be starting to point towards profitability for this division as the CEO, Thomas B. Pickens III, stated:
“We are also growing ASTC value by investing in our Spacetech (1st Detect) initiatives by partnering with key industry participants to develop compelling solutions that address imminent and compelling economic needs. We are also very proud to announce the completion of our new development facility in Webster, TX, where 1st Detect is ramping up its manufacturing capabilities in anticipation of maturing joint development partnerships. We are educating a number of high value markets with the opportunity to sell solutions that meet the general needs of quantitative analysis on the factory floor.”
1st Detect describes its product as:
“A small, low power mass spectrometer designed initially for the laboratory market. The unique design of this unit enables mass spectrometric quality chemical analysis in a small package (about the size of a shoebox) that operates off less power than a typical light bulb. This allows high quality chemical analysis to be performed in locations where mass spectrometers have not been used before, such as directly on the factory floor or in the battlefield, without compromising the quality of the analysis.”
The company also adds,
“Due to the high speed performance, analytical capability and flexibility of the product, the Company’s best opportunities involve applications where real-time monitoring is required. There are also significant opportunities in the industrial research environment where the mass spectrometer technology allows partners to offer high performance analytical capabilities on their own sample preparation systems while improving their margins and reducing their customers’ bench top space requirements. Market opportunities that 1st Detect is exploring include Security and Defense, Food and Beverage, Pharmaceutical, Industrial Processing, Healthcare and Diagnostics, Environment Testing and Research.”
In the fourth quarter, Astrotech showed it can turn a profit even while supporting 1st Detect’s operations. If 1st Detect can manage to just breakeven, the stock should see multiples of its current price. If 1st Detect can become profitable, Astrotech could be a home run. This is a textbook asymmetric opportunity: the downside risk is low because of sustained and predictable profit from the satellite processing division and the strong balance sheet that has tangible assets sitting 70% above current market capitalization. The upside is significant as the satellite processing division earned about $0.15 a share for the year. Factoring out 1st Detect, if investors were willing to pay 15x earnings, the stock would be trading for $2.25, roughly 125% above current market price. Obviously, if 1st Detect is able to become profitable then the stars are the limit (pun intended).
Source of the article: http://seekingalpha.com/article/1747402
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