Like Superman, American Science & Engineering
After the Sept. 11 attacks, government demand for better security tech soared up, up, and away. So did AS&E's stock, which peaked around $93 a share in early 2011. Despite a steep drop to around $55 since then, it remains more than 842% higher than it traded the day before the attacks, compared with a 24% total gain for the S&P 500.
What tugged on AS&E's cape last year? Budget cuts. The company drew 62% of its 2012 revenue from the U.S. government. It gets 23% of all sales from one unnamed agency -- presumably the Department of Homeland Security, which buys AS&E's next-generation X-ray machines for airport screening, among other equipment. Ominously, the DHS's total 2013 budget request shrank by 2% from 2012, including a 3% cut for the Transportation Security Administration. AS&E clearly can't rely on government largesse to fuel future growth.
Its own worst enemy
Even a small slice in federal budgets can wreak huge havoc on AS&E. Its FY 2012 numbers took a swift, sharp plunge:
|Full-year net sales||$203.55 million||$278.57 million||(26%)|
Source: Company 10-K for FY 2012.
AS&E still has $192.5 million in backlog waiting, including $112 million from Uncle Sam. But total backlog dwindled 10.5% from 2011, while the U.S. government's portion plunged 26%. Worse yet, AS&E notes that the feds could still cancel those orders at any time.
Despite this, the company's inventory rose 2% year over year in 2012, which AS&E attributed to preparations for future demand. While raw materials fell, and works in process stayed roughly flat, the dollar amount of finished goods increased 192% to more than $7.78 million. Meanwhile, previous years' products aren't flying off the shelves. The company's reserve for excess or obsolete inventory leaped 27% to $6.2 million.
The Legion of Doom
While few stocks offer AS&E's pure play on security technology, the company battles numerous competitors. Massive L3 Communications
AS&E's trailing P/E of 23.6 looks cheaper than OSI's 29.9 but seems massive compared with L3's 7.7. The latter company pays a 2.8% dividend yield, but its exposure to Uncle Sam's imperiled spending leaves L3 in the same danger as AS&E. OSI pays no dividend, but its more diverse product lines may make it a safer option for potential investors.
Escape from a doomed planet
It may face formidable foes, but AS&E's not powerless. A portfolio of 48 patents, with more on the way, sharpens its competitive edge. To fuel further discoveries, it boosted research and development spending roughly 12% in 2012, to $25.54 million.
The company offers a 3.5% dividend yield. After a 40% increase last year, its payout consumes 68% of its net income. But when you measure AS&E's dividend against its $45.86 million in fiscal 2012 free cash flow -- up 24% year over year, despite fluctuations along the way -- that ratio shrinks to 38.8%.
Furthermore, just as Superman's folks rocketed him away from dying Krypton, AS&E aims to flee dwindling government contracts by landing new business abroad. International sales shrank more than 20% in 2012 but represented a greater proportion of AS&E's overall revenue, at 34% compared with 32% in 2011.
Not a hoax, dream, or imaginary story
Since government spending ebbs and flows, and our need for better security persists, I wouldn't count AS&E out yet. Even Superman came back from the dead. But unless it can dramatically accelerate its international expansion, you don't need X-ray vision to see that this company's near-term prospects look anything but heroic.
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Mild-mannered Fool writing coach Nathan Alderman fights a never-ending battle for clarity, active voice, and the Oxford comma. He holds no financial position in any companies mentioned. The Motley Fool owns shares of L-3 Communications. Motley Fool newsletter services have recommended buying shares of L-3. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.