Contributing editor Ryan Irvine is here this week with a new recommendation and some updates on previous ones. Ryan is the CEO of KeyStone Financial (www.KeyStocks.com) and is one of the country's top experts in small cap stocks. He is based in the Vancouver area. Here is his report.
Let's start things off this week with a new stock selection, one that is suitable to investors who can handle risk. The company is Firan Technology Group (TSX:FTG, Financial), which trades on the Toronto Stock Exchange under the symbol FTG and on the over-the-counter Grey Market in the U.S. as FTGFF. Here are the details.
Background: Firan is a leading global supplier of aerospace and defense electronic products and subsystems. With facilities in Canada, the United States and Tianjin, China, Firan provides prototype development and manufacturing services complemented by quick turnaround production runs. The company has two operating segments: FTG Aerospace and FTG Circuits.
The printed circuit board business is one typified by lower margins than we typically choose to invest in. Having said this, Firan operates in the higher end of this market and, as a result, the company can produce better relative (albeit still lower) margins. At present, one of the more attractive aspects of the company is the strong benefit it derives from the lower Canadian dollar.
Financial highlights: The company recently released record third-quarter financial results. Net sales for the quarter increased 23% to $18.2 million. Both business segments participated in the growth. Revenues also benefited from the weakening of the Canadian dollar versus the U.S. dollar, which was down 19 cents versus the same quarter last year. Over 80% of FTG's revenues are denominated in U.S. dollars. U.S. dollar currency hedges reduced reported sales and earnings in the quarter by approximately $700,000. As a result, approximately 13% of the growth was due to the weakening of the Canadian dollar and 10% was increased activity. Year-to-date sales increased 21%.
Net earnings for the quarter were $1.64 million (8 cents per share, fully diluted). Earnings jumped considerably from $219,000 (1 cent per share) in the same quarter of 2014.
Firan is exposed to foreign exchange fluctuations as the vast majority of sales are earned in U.S. dollars, while a significant amount of operating expenses are incurred in Canadian dollars. The company regularly enters into forward exchange contracts to sell excess U.S. dollars generated from its Canadian operations. The weakness in the Canadian dollar positively impacted the operating results (revenues) during the four quarters of fiscal 2014 and the first three quarters of fiscal 2015 offset by the negative impact of the realized loss of the foreign exchange forward contracts.
Over the next one to two quarters, the rolling hedges, which are negatively affecting current results (by approximately $700,000 or 38 cents per share in the third quarter), will likely be renewed at more favorable rates. As such, another kick from the lower loonie should be seen in about three months. We estimate every penny decline in the Canadian dollar adds 1 cent in earning per share for FTG.
Conclusion: Fundamentally, the company has earned around 21 cents per share over the past 12 months. That figure would have grown by over 2 cents if the one-time costs related to unexpected program cancellation, inventory adjustment and increased net research and development to develop common controller card/power card for cockpit control assemblies were removed from first-quarter results.
Removing the rolling hedges from the second quarter would have increased earnings by $0.028 per share and in the third quarter by $0.038. Based on this, FTG trades at around 7.5 times normalized trailing earnings, which is relatively attractive for a company with the potential to produce growth in 2015 and into 2016.
The company's Enterprise Value to EBITDA ratio of 5.7 is also relatively attractive. Earnings before interest, tax, depreciation, and amortization (EBITDA) for the trailing twelve months is $7.1 million, a significant increase from $5.6 million in the previous quarter.
Looking forward into the fourth quarter, the company has a solid order book and we expect material growth over the numbers produced in the final quarter of last year, which should result in a record full year 2015.
Given its liquidity and the inherent volatility this brings, the stock should only be considered by risk tolerant investors. In the near term, we are recommending placing limit orders below the $2.30 level.
Action now: Buy below $2.30. The shares closed on Friday at C$2.11, US$1.77.
