Cubic Corp. (CUB, Financial) designs, integrates and operates systems, products and services that increase situational awareness in the transportation and defense industries. The company’s stock has moved by 54% in the last year; considering it has a focused approach toward high growth and a higher margin strategy, Cubic still has a lot to offer in the long run.
Company overview
Cubic is the parent company of three reporting segments including Cubic Transportation Systems (CTS), Cubic Global Defense (CGD) systems and CGD services. The company has a diversified international presence with approximately 57% of the sales from federal, state and local governments and approximately 33% from foreign governmental agencies.
Cubic Transportation Systems
The company functions as an integrator of payment and information technology along with services for travel solutions. The intelligent travel business has 38 million travelers using Cubic technology each day with 24 billion transactions and $18 billion revenue per year. The transportation system segment has generated $586.4 million as revenue for fiscal 2016 of which 56% was through services and 44% through product sale.
Cubic Global Defense
This segment provides defense training solutions and communication technologies. The company has been able to successfully install/deliver a significant number of training and instrumentation kits worldwide and also provides highly specialized support services for military and security forces of the U.S. and allied nations.
Moreover, the company is focused on expanding its adjacent markets to increase the annual addressable markets. The company plans to enter the adjacent markets by expanding its service offerings, winning new contracts, conducting research and development, partnering with other companies and acquiring complementary businesses.
How Trump’s presidency will impact Cubic’s business
Donald Trump’s priorities for defense, infrastructure and taxes can be considered to have a positive impact on Cubic’s growth. This is primarily because the government plans to increase its defense spending to rebuild the U.S military to improve the readiness and counter traditional and nontraditional threats. It also expects allies to share the cost burden for defense and at the same time leverage on creating higher-paying jobs in the U.S.
From the infrastructure perspective the government supports spending to create U.S. jobs and also supports both public and private investments to improve cities and infrastructure. Also, lower U.S. corporate tax rates and accelerated tax benefit from capital expenditure plans would require both live and virtual training exercises and also relevant engineering and related technical support. Cubic already provides such products and solutions to the government; increase in such demand post the implementation of the government plans would boost the company’s business.
Goal 2020
Goal 2020 strategy focuses on a strategy which aims to exceed its revenue by another $2 billion with EBITDA margins growing by 10% year over year. This can be achieved by both organic growth and acquisitions and through five strategic objectives of the company. The strategic objectives include winning the customer, building that NextCity globally, growing C4ISR globally, building NextTraining globally and living One Cubic.
Winning the customer is involved in innovation so as to deliver superior solutions earlier. This will help it have an added advantage over its competitors. Build NextCity globally aims to expand its business in the adjacent market which is beyond fare collection to intelligent transportation, toll, parking and mobile. Similarly the other three strategies also aim at expanding its secure communication and network along with innovative and integrated solutions.
With a plan to continue investing in the NextCity transportation and C4ISR and well thought accretive acquisitions, the company expects improved cash flows and hence more flexibility in increasing its dividend. As stated, if Trump’s priorities in defense and infrastructure are implemented, the demand for Cubic’s defense service is likely to increase. Thus, considering the company’s goal of further expanding its business in higher growth and higher margin business areas, Cubic will have significant upside in the long run.
Balance sheet and cash flow analysis
As of Sept. 30, 2016, the company had total debt of $441 million as compared to $186 million as on Sept. 30, 2015. This is primarily because of the acquisitions of GATR technologies and TeraLogistic that resulted in $243.5 million of cash paid for acquisitions.
As I have already discussed the company’s vision of Goal 2020 had significant accretive acquisitions in fiscal 2016 and considering the scope of the project we can expect significant investments in fiscal 2017 as well. This might impact the company’s debt, but this should not be a concern as the company has enough cash from operating activities and free cash flow to meet any short-term obligations and at the same time create shareholder wealth.
Fiscal 2017 guidance
Fiscal 2017 would be a foundation year for the implementation of the company’s strategy to achieve the vision of Goal 2020. The management expects the revenue to be within the range of $1.505 billion to $1.555 billion, representing a marginal increase from last year. Growth is also expected in the mission solutions business due to rampup on the GATR, U.S. Army and T2C2 program.
Positive growth is expected in both the defense and transportation segments as the new presidency has shown its priorities toward both military and infrastructure sector. As a result of this, the company would have a significant upside, both in the operating income and adjusted EBITDA of fiscal 2017.
Conclusion
Cubic is revamping its business and streamlining its products and service offerings. Though the stock has shown positive growth in the past year, Cubic still has the potential to grow further. The assumption is primarily on the environmental and economic condition that supports the business model. Cubic can be considered in the portfolio for long-term investors.
Disclosure: No position in the stock discussed.
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