WSI Industries could be a long term winner
December 26, 2007
By: 
Arohan
Category: WSCI
WSI Industries Inc (Nasdaq: WSCI) out of Monticello, MN is my first candidate for an attractive investment in the metal-working industry profiled earlier on this blog. The company is a precision contract metal machining shop currently doing about $19 million in annual sales. This is a micro-cap in all sense of the word and so a careful evaluation is in order.
(A note about investing in micro caps: Since these stocks trade at very low liquidity, deep due-diligence is advised before investing. The investor should also be willing to hold the position for a long period of time in order to realize the best profit out of the investment. Daily stock prices are mostly noise and while it may offer short term profit opportunities, capitalizing on these opportunities is difficult due to low liquidity)
Here is a brief recap of the basic fundamentals of the stock:
Annual Sales (ttm): 18.81 m
Sales Growth (Qtly, yoy): 21%
EPS Growth (Qtly, yoy): 47.1%
ROE: 9.7%
P/E (trailing): 21.73
P/B: 2.16
Market Cap: 15.79 m
Dividend yield: 2.5%
I know what you maybe thinking. A PE of 22, and this is a value stock! How!
To judge whether a stock is undervalued, I believe you should look at what is in store for the company/business in the future. I invite you to read the following stunning press release put out by the company some time ago. The company announced an incremental 10-11 million business for the fiscal year 2008 with backlog stretching into 2009 in the energy sector, which the company just entered. Compare the incremental business to its trailing annual revenue of about 19 m. This is better than 50% increase in sales which should translate in a higher eps increase. This move also diversifies the company’s customer base, that includes, recreational vehicles, bio-sciences, aerospace and defence
The company also runs an excellent balance sheet with Debt/Equity ratio less than 0.5
As a business owner in this sector, this company looks attractive enough to own in its entirety. As a stock investor, if one were to take a position in this company, it would be wise to hold on for few years and let the full potential of the company play out
Related posts:
- For WSI Industries 2008 is off to a great start
- Investments update …
- Metal working and service industry in North America
- Micro/small cap investing can be rewarding but risky
December 29th, 2007 at 2:21 am
Arohan,
It looks like earnings have recovered over the last few years, but what made them drop in the first place? Revenues are just now reaching the level they were at in the last ’90s.
I like the healthy balance sheet, but even in it’s better years the ROE looks a little ho-hum.
Profit margins (currently 18.5%) are increasing, but competitors like PCP (25%) and SWK (36%) are way ahead of them, which will make it hard for them to get market share.
Lastly, I’m not sure how a company can get a competitive advantage in this industry except through profit margins. It seems like they’re offering a commodity product, so unless they can do it really cheap or can lock in their customers, I’m not sure how they can get an edge.
Thanks for the stock pick. I’m going to look a little deeper and see what I can find.
Take care,
John (Investing for Everyone)
December 29th, 2007 at 4:18 am
John,
I will share a few thoughts of mine that may address some of the points you raise. The main thesis behind this pick is a small cap in metal working industry with improving fundamentals and growth. This is one of the few times that I have made a macro call on an industry and tried to find a good business to invest in.
Before I go any further, I would like to point out that WSI does Precision machining for very close tolerance applications. This is not a commodity product. SWK is really not a comparable company as it is primarily a tool/tooling manufacturer (machiners/fabricators are consumers of tooling; completely different customer base and different positions in the value chain). One can argue that PCP is a comparable to some extent (even though forging/casting are different processes than machining).
Second, all fabricators are not equal. Fabrication business is very fragmented in North America with the individual players more often than not tied to a specific industry, in many cases to a sigle customer. This is another reason why I hesitate to call this a commodity business. Additionally, fabricator operating in the aerospace sector (supplying Boeing for example) works in a completely different economic environment, profit margins, etc than a company that supplies Automotive tier companies.
Third, scale has a lot to do with how much profit margin one can realize. This is a very capital intensive industry. A smaller company will always operate at lower margins. PCP has enormous scale and can operate much more efficiently. But really, there are very few companies in this sector that are large. Most of the companies are very small (I know because I own and run one of these companies). It is in this kind of environment where an enterprising company that is growing scale and diversifying customer base will improve its fundamentals.
I believe that improving fundamentals will result in improved business valuation (and hence the stock price). I am not too concerned about how its ROE compares with others
Also a brief comment about my philosophy: My main goal is to try and find companies where I think the upside potential is much much higher than the downside
I am not aware of the historical trend that you refer too and will have to investigate that
Thanks,
Arohan
January 7th, 2008 at 3:00 pm
401k I think sometimes can better than your Ira I believe you should max out your 401k if you employer matches the amount you put in . Even though Ira offers more versatility a 401k would be the best choice
www.livelymoney.blogspot.com
January 16th, 2008 at 10:30 pm
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