Defense/Aerospace Industries

[DewDiligence]

Cubic Corp: Under The Radar?

[There are many things to like about this company from an investment standpoint. The mass transit segment, which comprises 30% of sales and 40% of profits, figures to benefit from the Obama administration’s proclivity to fund transit projects and from The Global Demographic Tailwind (#board-15787). Defense comprises the other 70% of sales and 60% of profits; half of total sales come from annuity-like service contracts. The balance sheet is rock solid, and the number of shares outstanding never increases; the executive officers are old, and hence one might expect that a sale of the company is the cards at some point in the not too distant future.]

http://www.thestreet.com/print/story/10665038.html

›By Jake Lynch
01/22/10

BOSTON (TheStreet) -- Cubic Corp. (CUB) is a defense company with a twist.

The San Diego-based company divides its operations into three units: transportation systems, defense systems and mission-support services. Transportation systems, which posted $303 million in annual sales and is a leading global provider of automated fare collection systems, provides necessary diversification from military contracts.

The transportation business also enjoys the highest operating margin of the three units. In 2009, it amassed $44 million of operating profit, which translates to a profit spread of 16%. Defense systems and mission-support systems notched operating margins around 7%. Management projects a doubling of revenue over the next 10 years and expects new contracts with municipal transit authorities, which will feel pressure to outsource services to more-efficient vendors as state budget deficits soar.

Cubic's fiscal fourth-quarter profit [the FY ends Sep 30] soared 54% to $12 million, or 46 cents a share, as revenue climbed 19% to $281 million. Its net margin, unchanged at 4%, lags behind those of large-cap peers like United Technologies (UTX) and Lockheed Martin (LMT). But Cubic has redeeming features, namely its balance sheet. The company holds $253 million of cash and just $25 million of debt.

The cash balance more than doubled since the year-earlier quarter as the company's debt load lessened by 21%. In addition, Cubic is a comparatively cheap stock. The shares are cheaper than the aerospace and defense peer group based on trailing earnings, projected earnings, book value and cash flow per share. However, its PEG ratio, a measure of value relative to growth expectations, is high at 1.4. By comparison, the industry average is 0.9. On that basis, the stock is expensive when considering analysts' expectations.

But the company's growth rates offer a differing perspective. During the past three years, Cubic has grown revenue 7% annually, on average, and boosted net income 32% a year. In addition to its promising transportation-systems business, one area of defense systems offers compelling growth prospects. Cubic is a leader in tactical-engagement simulation systems. In other words, it designs advanced computer systems for military training. For example, recently developed CombatRedi projects three-dimensional virtual-combat scenarios for troops.

The U.S. military is always going to need guns and bullets, but in the future, the most profitable areas will be high-tech. Based on this reasoning, companies like Cubic Corp. and recurring Under-the-Radar pick ManTech International (MANT) are investments worth considering.‹