In today’s market environment, bargains are few and far between. Solitron Devices (SODI, Financial) is that rare exception. Solitron is a good business, with a high-quality aligned management team and trades for just than 5.6 - 6.5 times my estimate of FY 2023 earnings (net of cash and securities). The company has been successfully led through an operational turnaround by hedge fund manager Tim Eriksen (Solitron’s CEO). I provide more background on Solitron’s business and discuss the turnaround in my original article. Solitron’s management team has continued to execute well yet the stock remains deeply undervalued.
On June 28th, 2021 Solitron announced preliminary Q1 revenues and bookings. This press release highlights the transformation that has taken place at this business in recent years. It is clear that Solitron has hit an inflection point. The outstanding Q1 figures follow a strong FY 2021 result where the company recorded net income of $1,381,000.
The press release notes that sales in the current fiscal year are expected to grow modestly from the level that the company achieved in FY 2021. The growth in sales will lead to a significant increase in profit because this business has a high degree of operating leverage. For every dollar of sales growth, 40 - 60% of those incremental sales dollars fall directly to the bottom line. The press release also notes an impressive growth in bookings compared to last year. Bookings rose 39% in the first quarter of FY 2022. The increase in bookings corroborates management's expectation of growing sales.
My base case assumes that sales will grow from $10,534,000 in FY 2021 to $12,000,000 in FY 2023 (growth of 14%). This would increase profitability by $586,400 - $879,600 due to the inherent operating leverage in this business.
Solitron purchased a new headquarters and manufacturing facility in March of this year with relocation to the new facility planned in the company’s fiscal 3rd and 4th quarter. FY 2022 results will be impacted by the cost of having two manufacturing facilities and the relocation expenses associated with the move. Solitron’s profitability is likely to increase significantly in FY 2023 as the sales growth noted in the press release materializes and at the same time the company is able to streamline their cost structure. The new headquarters and manufacturing facility that Solitron purchased in March of this year will save the company $300,000 - $350,000 per year in expenses (net of the cost of the new mortgage). This alone will provide a solid boost to earnings beginning in FY 2023
In FY 2021 Solitron produced net income of $1,381,000. When incorporating the increased profitability that will be generated by sales growth as well as the cost savings, Solitron is likely to produce net income in the range of $2,267,000 - $2,610,400 in FY 2023. This is in line with what was estimated in my write-up on Solitron.
Tim Eriksen has always been conservative when making any sort of future projections in the press releases. In every case, he has set expectations low in order to beat them in future quarters. Therefore, I believe my assumptions are likely to be conservative given that Tim has guided to modestly higher sales growth and at the same time the new facility will result in lower operating expenses (primarily due to the elimination of rent expense). Sales are growing at the same time expenses are being streamlined. As a result, I am quite confident that Solitron’s earnings will grow materially in FY 2023.
Solitron’s stock remains deeply undervalued and is currently trading for just 5.6 - 6.5 times my estimate of FY 2023 earnings (net of $4,033,000 in cash and securities). At a valuation of 13 - 15 times projected FY 2023 net income, plus net cash and securities of $4,033,000, Solitron is worth $33,500,000 - $43,200,000, or $16.08 - $20.73 per share. At the current share price of $9, Solitron's shares have 79% to 130% upside.
