UltraLong (100.00)

Better Know A Stock - Part 12

August 27, 2009 – Comments (2) | RELATED TICKERS: TAYD

The inspiration here is all Stephen Colbert's.... he has his series of "Better know a district" so I figured why the heck not... Better Know a Stock, companies that are never followed or too small to be heard of. So here goes that 9000 part series.... =)

Taylor Devices (NASD: TAYD)

Taylor Devices is hoping to literally shock you into buying their product and their stock! Taylor Devices supplies countless industry segments with various degrees of shock absorption products which help to alleviate the stress on structures from seismic vibrations. It could be that TAYD products are used to help stabilize a building in a heavily active seismic quake zone, or it could be as simple as stabilizing a crane or other structure in an explosion zone. Whatever it is, if there is a threat of vibrations destroying a man-made structure, TAYD wants their shock absorbing devices used to protect it!

From a fundamental perspective Taylor Devices looks incredible. They are currently trading at just 0.85 times their price to book value and 0.63 times their sales valuation. Historically they have increased revenue at a nice clip over the past couple of years from 14.7M to 16.5M to 18.5M while growing their profits each year. Admittedly the economic downturn has impacted profits and we will most certainly see their first drop in profits in 2009 in quite some time. The positive light I can spin on this is that despite many of their orders being put off until later due to weaker construction demand, very few orders have been cancelled as is evidenced by their 12.4 million dollar order backlog which is actually up 1 million dollars in the past six months.

Something that is particularly interesting about Taylor Devices that I've noticed from following it over the years is that it is 100% a news-story mover. Taylor Devices very typically trades a few thousand shares per day and with only 3.02 million shares floating has very few shareholders on record. When Taylor Devices can actually mount a little volume it tends to move in leaps and bounds, or should I say spikes! Now what creates these spikes you might ask? Well, your best, and I mean your absolute best way to play off of the misery of a large and devastating earthquake is TAYD. Over the last decade, I have witnessed a few major spikes in volume and price and they always accompany an earthquake since TAYD's seismic devices are used to prevent structural disintegration from earthquakes. The Malaysian earthquake in 2004 skyrocketed TAYD from $2 to $8 practically overnight. Likewise in 2001 the Seattle earthquake in the United States caused its stock to jump over 100% in a short time span. Keep in mind that TAYD isn't a one trick pony and that their shock absorption technologies can be used in bridges, oil platforms, automobiles and buildings just to name a few things.

One drawback however of being such a small company is getting any sort of information at the click of a button. Taylor Devices currently has no analyst coverage and they appear to be living in the stone age because their website seems years old and apparently you still need to send away for shareholder information packets from the company. With that, finding out any information on management can be a challenge and an immediate shoulder-shrugger for me. On this accord I'm giving them a stern wag of my finger.

Institutional ownership took a major dive this year as the company dipped very rapidly below $5 per share, a level at which many institutional investors will choose to sell because the psychological risk factor increases. Interesting to note however, not one sale of TAYD's stock by officers of the company in at least two years. In fact, although its been nearly 15 months, the last two insider transactions were purchases of nearly 66,000 shares in common stock. Keep in mind like many publically listed companies TAYD does have stock options which can be executed here and there but not nearly enough to permanently damage shareholder value.

What could derail Taylor Devices? Well, any prolonged contraction of the construction sector obviously puts increased pressure on TAYD. It's no secret that you need a moderately robust economy to supply your shock and seismic technologies to the construction, aerospace and automobile industry. Although TAYD has a 5 million dollar revolving credit facility, any major increase in expenditures could derail the company as well. Right now TAYD capital expenditures runs around $700,000 per year which could of course dramatically increase with increased competition or a poorly timed merger/purchase. Luckily TAYD runs a fairly tight balance sheet and debt is usually under control (historically under 1.6M dollars and currently just $276,000).

Is Taylor Devices under significant pressure due to the economy right now? Absolutely! Is it undervalued based on current economic conditions? I definitely think so, but not to the point where it's a screaming undervaluation. Admittedly its earthquakes which are the predominant catalyst to Taylor Devices stock price and unfortunately they cannot be predicted. Chances are that if you go by the historical patterns based on their chart you will almost assuredly make a handsome gain from these levels. TAYD tends to be historically range bound between $2 and $8 and if you play those corners properly you could make a nice amount, though you could be waiting up to 3-5 years for your big return. I'd be willing to bet that TAYD will remain profitable despite these tough economic times and will turn something on the order of a 11-12 cent profit in 2009 and closer to 20-23 cents in 2010 which places their forward price to earnings (remember, this is my guestimate) closer to 13-14. Considering a weakening in revenues this year and a modest 9-12% jump next year, I'd place a fair value 12 month estimate around $4.55, or roughly 15% over book value. It's long-term outlook appears rosey from here and as I stated above, your best bet would be to hold for the medium-term (3-5 years) and wait for that next major earthquake to pump this back above $6.

I do not currently own shares in Taylor Devices.

Those numbers don't lie, and that ain't no bull!

UltraLong