Regular readers may remember Rex Moore's mention of Engineered Support Systems (NASDAQ:EASI) in an October column, in which he mentioned the company as one that made it through a rigorous set of screens. He started with our Foolish 8 criteria, tweaked it a bit, and then added in requirements considering free cash flow and return on equity. Five companies, including Engineering Support Systems (ESS), made it through his gauntlet.
The company's shares have performed well since Rex's work "unearthed" it. The company is back in the news today: ESS announced after Friday's close that it closed on the acquisition of Pivotal Power, which makes power supply and conversion products for companies including General Dynamics (NYSE:GD), Northrop Grumman (NYSE:NOC), and Raytheon (NYSE:RTN). The deal will cost ESS $10 million in cash, plus $700,000 in non-interest-bearing debt.
Pivotal Power would seem to fit in well with ESS' broad range of businesses, which includes power generation equipment, electronic warfare systems, avionics test equipment, and chemical protection systems. In other words, the company supplies a cross-section of gear used by the Department of Defense, other agencies including the U.S. Postal Service, and the drug industry. (No, not thatPostal Service, though that would be cool.)
Pivotal generated $1.5 million of EBITDA on $7.5 million in revenue in its latest fiscal year ended Sept. 30. Those numbers aren't huge when compared to ESS' figures. The company turned in sales of $403 million and EBITDA from continuing operations of $56 million for the three quarters ended July 31. (Fourth-quarter and full-year numbers are scheduled for release before tomorrow's market open.)
But Pivotal's operating margins are comparable or even better than its new parents'. Pivotal looks like a natural fit with ESS' Light Military Support Equipment segment, which generates major chunks of the company's revenue and operating income. And ESS paid significantly less for Pivotal -- on a price-to-sales basis, anyway -- than an investor would for its shares today.
At first blush, this deal looks like a solid move for a company that's been shown (as Rex's investigations suggest) to be doing a lot of things right -- and being rewarded by the market for it. ESS' shares have outperformed the Standard and Poor's 500 by a wide margin over the last 12 months.
Will ESS continue to post market-beating returns? Hear what Fools are saying on Engineered Support Systems discussion board. Dave Marino-Nachison can be reached at [email protected].
