Arotech: Military Micro-Cap

03/05/2014 7:00 am EST

Focus: STOCKS

For those comfortable with the inherent risks of low-priced stocks, The Bowers Report specializes in micro-cap issues; here, editor Thomas Rice highlights the service's latest "Company of the Month."

Arotech Corp. (ARTX) is a defense and security products and services firm; it provides simulation for military, law enforcement, and commercial markets.

Its vehicle simulation systems cover a variety of vehicles, such as trucks, trains, buses, fire trucks, police cars, and ambulances.

Its military operations develop analytical models and simulations for tactical air and land warfare systems for the Department of Defense and industrials contractors.

The smaller of its segments, which accounts for 24% of the company's revenues, manufactures lithium- and zinc-air batteries, including the Soldier Wearable Integrated Power Equipment System (SWIPES).

In 2012, the firm sold its armor division. Over the past year, Arotech has turned around its financial in a major way.

For the past nine months, revenues grew 16.8%. And the company reported $2.7 million in positive earnings, compared to a $2.5 million loss of the same nine months last year.

The company's balance sheet has also improved. ARTX reported backlog of $74.4 million for the most recent quarter. Its current assets have grown from $36.4 million in December 2012 to $39 million in September 2013. Over the same period, current liabilities have dropped from 426.5 million to $19.4 million.

As a result, the company has grown its working capital and improved its current ratio. Book value has also improved, increasing from $2.61 to $2.98 per share.

Since the company decided to sell its less profitable armor division, its financials have shown very good progress. Revenues have continued to grow, and the company has hit profits and maintained them.

Despite the tough government environment, Arotech has continued to win contracts; ARTX reported backlog of $74.4 million for the most recent quarter.

One thing to watch with the company in the future is dilution. In September, the company issued 3.4 million shares of common stock in a public offering. While there are still just about 16 million shares, we are not worried at this point. Further dilution, however, is something to keep an eye on.

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