Savvy Trades and Investments

[Swick984]

LMIA - I have been heavily buying shares of LMIA the past few days after their quarterly earnings announcement. While the quarter was nothing to wildly celebrate, I think it highlights the progress the company is making to turn around its business. At the end of 2012, they made a large acquisition of Valent Aerostructures, which was financed with debt. The company's performance has struggle since then, which combined with the increased debt load has pressured shares significantly since the acquisition. Due to the poor performance, new management was brought in 2014-2015 to help guide the turnaround of the business.

Since new management joined the company, they have aggressively moved to cut cost, close excess facility and refocus the business on profitable growth. I think this is where the opportunity lies with LMIA. They have garnered a growing share of components on high growth, next generation commercial platforms (737 and 737MAX, 787, 777x, HondaJet, next-gen Gulfstreams). In each of these platforms they have been able to increase the amount of content and revenue per shipset. The growth on these programs will begin in 2017 and accelerate into 2018 as production volumes of these aircraft ramp up. As a result, the company is guiding for revenue growth in 2017, the first year of growth since 2012. Mid-point guidance points to growth of about 8% in 2017. However, the large growth will really occur in 2018. They have stated a target growth of 9% CAGR from 2015 to 2018. That implies a growth rate of 20%+ in 2018. Analysts pointed this out on the last conference call and management confirmed. They are also guiding towards increased margins through 2018, with EBITDA margins up 300 bps from 2015 levels.

I've run various models based on these projections for 2017 and 2018. The company has a large NOL that they can use to offset taxes in 2017 and most taxes in 2018. The NOL's were valued at $13 million or so at year end 2015. I think they have had losses through YTD 2016, so they've build up additional NOL's since then. Based on these management guided results, I think we could see EPS in the neighborhood of $1.10 in 2017 and over $1.60 - $1.80 in 2018. I have strong confidence in these forecasts given that their revenue per shipset is set by contract and the shipment schedules from the jet manufacturers are pretty set at this point, given the large backlogs. These contracts are also long-term in nature, with terms well over 5 years. They also have additional opportunities that they are working on to increase content further on new programs.

I think the market hasn’t yet priced in this growth opportunity. I think fair value today is closer to $11 - $12 per share. If the company can execute its plan and grow at the levels it is guiding, then by 2018, I think we can see a share price that is approaching $20 - $25 per share, based on increased earnings and lower leverage. Potential upsides include additional content wins in the interim, a return of growth in their engineering services business, and a refinancing of their debt to something at a lower interest rate. Risks include operational risks of achieving these projected results, though I believe management has been taking the right steps to ensure they product to plan. They also have significant experience in the space running much larger division in the aerospace industry (also have 17.6% equity ownership). Overall, I think this is a very attractive long-term opportunity that will take 2 years to play out, but could be quite rewarding, especially at the current price. I would appreciate anyone’s thoughts.

Here is a link to their recent investor presentation highlighting some of the above points I mention.

http://files.shareholder.com/downloads/LMIA/3195949586x0x916217/212D0740-0099-49BC-B350-3348A37A80E5/LMI_PathwayToEquityGrowth_Nov2016.pdf