UAVs: Unmanned Potential
09/24/2004 12:00 am EST
In addition to fundamentals, Jim Collins has a proprietary momentum strategy that focuses on earnings and technical strength. His latest buy is an intriguing play on UAVs—unmanned aerial vehicles—used primarily by the Department of Defense. Here's his review.
"United Industrial (UIC NYSE) makes unmanned aerial vehicles (UAVs), test systems, training systems, and support services for defense contractors. The company sells it defense products to the US Defense Department. The firm makes UAVs that are used by ground- and sea-based forces to conduct surveillance, reconnaissance, and target acquisition tasks. In addition to UAV production, the company provides a variety of UAV-related contractor support and logistics services, which could ultimately generate more revenue than equipment sales. The Department of Defense sees UAVs playing an important role in increasing the military’s mobility and capability while minimizing the risk of injury to soldiers. The government has therefore announced that it plans to more than double funds for the UAV program from $1.5 billion in 2003 and $3.5 billion by 2010, and United Industrial should benefit from this increase in spending.
"The company’s test systems are primarily used to assure that aircraft electronic warfare and radar systems are ready for use. The company’s JCEST test system is planned to support all US fight aircraft. United Industrial has obtained orders for over 300 JCEST systems with delivery stretching into 2005. Its training products include radar simulators and combat system trainers that are installed on over 95 US Navy vessels. The company also makes maintenance simulators for the C-17 cargo play, the E-3 AWACS, and the E-8 surveillance aircraft.In August, United Industrial announced that they were awarded a $160 million contract from the US Defense Department to provide contractor logistic support for joint service biologic detector systems located around the world. The duration of the contact is over five years. For the quarter ended June 30, 2004, United Industrial reported earnings of $0.77 per share, 93% higher than the $0.40 a share reported in the year ago quarter. Revenues increased 27% to $110 million compared to $86 million in the prior year.
"Since pulling back to near its 200-day moving average in March, the company’s stock has been trending upward, driven by strong financial performance, new contract announcements, and a positive outlook at its annual investor meeting. Since its March bottom at $17.32, the shares have risen over 70% to above $30. Of the 10.7 million shares in the float, 117,000 change hands daily. There are risks, as the US government accounts for substantially all of the company’s revenues and orders are dependent on timely funding by government agencies and any delay in funding can cause volatility in the company’s financial results. In addition, the company receives its order in the form of large contract awards whose timing and duration can be difficult to predict. Overall, the company receives a B+ for accumulation and distribution and has a relative strength rating of 97."