This article is part of our Rising Star Portfolios Series.
My research takes me in many directions, often resulting in dead ends. But last week I stumbled upon an intriguing company called Breeze-Eastern Corp.
This is because in our Rising Stars portfolios we are limited to companies with market capitalizations of at least $200 million. Since Breeze-Eastern clocks in at $65 million, I can't buy it for my portfolio. But you certainly can, and I don't see why I should let a good idea go to waste, so here it goes.
Breeze-Eastern makes rescue hoists and cargo hooks and winches for helicopters and fixed-wing aircraft platforms. It also makes weapons handling equipment. This sounds about as exciting as a bowl of gruel, but Breeze-Eastern is the world leader in these segments, with more than 50% of the global market. Its main competitor is a small division of Goodrich
Breeze-Eastern was part of a larger corporate enterprise with a tumultuous history which I won't go into here, but since 2005 it has been steadily reducing its debt and improving operations. The arrival of new investment from Tinicum Capital Partners in 2006 and the appointment of new CEO Mike Harlan in 2009 have spurred an increase in free cash flow and a more-focused growth strategy. Breeze-Eastern is working out its kinks, which should benefit shareholders down the road.
Future and valuation
The future for Breeze-Eastern looks solid with some upside. This is not a high-growth business. Indeed, it has been flattish over the past few years, but this could change. First, the company has significant content on the new European A400M cargo plane, built by EADS
From 2004 to 2009 Breeze-Eastern earned annual operating profits of $9 million to $13 million. Moreover, operating cash flow has steadily climbed from negative $7 million in 2004 to positive $12 million in the trailing 12 months. Annual capital expenditures should be a few million dollars going forward, so the potential exists for annual free cash flow in the $6 million -$10 million range. At $7 per share, the market capitalization of $65 million looks pretty cheap for a company with these sorts of market positions and a positive outlook.
Risks to the company include the A400M faltering yet again. Also, the top two owners hold 48% of the stock, and the next three hold 23%, so there is a chance that the company will be taken private at an unreasonable price.
Take a spoonful
Strong market positions, an impressive management team, and potential for modest organic growth make Breeze-Eastern look more like vichyssoise than gruel. Take a spoonful today if you like what you see. I would if I could.
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Andrew Sullivan, CFA, owns shares of no companies listed above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.