Nortech Systems operates in the Medical, Aerospace & Defense Markets and fall under the EMS industry. Nortech was founded in 1981 and has been steadily expanding operations, peaking in 2019 with annual revenues of 116M. Nortech currently employees over 890 staff at its various plants. This will come into play later. The company has historically been operating at a breakeven. Management stated the breakeven magic number is roughly 27 Million per quarter. This amount covers the fixed costs and any additional revenue results in profit after variable costs.
Covid/Government Incentives and Future Outlook
Like most companies, NSYS's 2020 numbers were impacted by the pandemic. Revenues have been affected by the shortage in materials and backlog of purchases.
Revenue dropped from 27.4m in Q1 2020 to 22M in Q1 2021. (25%)
This 25% drop makes NSYS eligible for the Employee Retention Credit
ERC Calculation
Credit amounts up to $7,000 per employee x 890 employees = 6.2 Million in ERC credits coming next quarter.
The company has stated it will be applying for the credit in a press release in March.
This 6.2 Million will be added directly to NSYS's Bottom Line for Q2 2021
Paycheck Protection Program Relief Loan Forgiveness:
NSYS entered into the PPP program in April 2020 and received 6.1 Million of forgivable debt under the circumstances that it be used toward payroll. NSYS will be applying for the debt to be forgiven in Q2 2021 per their latest annual report. They have met the criteria for the full amount to be forgiven.
This 6.1 Million will be added directly to their bottom line in Q2 2021 financials.
Future Revenues:
While NSYS's revenue numbers have dropped from 2019, the demand for their products have significantly increased. Once the shortages and purchasing delays get caught up, NSYS will be reporting record revenue figures.
Here is a backlog of their orders to be filled for Q2 2021:
Medical: 15.87M
Industrial: 10.12M
Aerospace 5.1M
Total : 31.1M
This backlog is up from 24.3 Million in the prior quarter. Backlog turnover time is roughly 90 days or once a quarter.
This means revenue for Q2 2021 is expected at atleast 31.1 M which would represent a 41% increase from prior quarter and be above their break even rate of 27 million. This 31.1m does not factor in smaller jobs ordered during Q2.
Net profit Q2 on 31.1M is expected to be in the 500k - 1M range if gross profit is at 15%-20%
Combine this with the up to 12.3 Million of government incentives you have Net income for Q2 2021 sitting at roughly 13 Million.
Valuation:
Market Cap: 18.4 Million
Q2 Net Income: 13 Million
Q2 Revenue : 31.1Million
Under any metric this stock is significantly undervalued.
The company will be sitting on a higher net book value then its share price after the debt forgiveness and government incentives.
Insider Buying:
Management believes this stock is undervalued and the CFO and CEO have both entered into share purchase agreements to purchase stock on the open market during the year.
Nortech’s chairman of the board, David Kunin, has established a Rule 10b5-1 trading plan to purchase shares of Nortech common stock on the open market in an amount up to $250,000 through January 2022.
Nortech’s chief financial officer, Christopher Jones, has established a Rule 10b5-1 trading plan to purchase 25,000 shares of Nortech common stock on the open market through March 31, 2021. (roughly 175k worth)
Two new purchasing plans were also entered into on June 1, 2021 for Miller and Chris Jones. Chris agreeing to buy more stock after his recent 175k purchase in Q1 2021.
Share Float:
The company currently has 2.66Million shares outstanding while the tradeable float is significantly below that.
The Kunin family and executives own roughly 61% of the float and increasing each buy back.
Mutual funds currently own 5% and are increasing their ownership.
There are a few large holders on message boards that own 7-10%.
This makes the tradeable float roughly 26% of 2.66M or 700k shares.
This low float will play a large roll during the next ER, due to the large income beat individuals who want to enter into this company and purchase shares will have to compete for shares driving the price up significantly.
Summary: NSYS is significantly undervalued and will be getting 12-13 million of government incentives during Q2 2021. This will be free cash going directly to their bottom line. The company is worth only 18 million currently and is extremely undervalued. This is why the CFO, Board and CEO have been buying shares like crazy and entered into a new purchase agreement earlier this week. Once next ER is released in July/August this stock will run to $20+ as it reports revenue growth of over 40% from prior quarter and 13M+ in net income.
Disclosure: I am long on this stock
