M-tron Industries Stock Tripled YTD, More To Come In The Medium Term (NYSE:MPTI)

I came across M-tron Industries (NYSE:MPTI) by chance when I was researching a wide range of IT companies. MPTI ranked first not only in its industry (21 companies), but in the sector as a whole (566 companies) based on Seeking Alpha’s Quant System.

MtronPTI, originally established in 1965, is a $105-million market cap company specializing in the design, manufacturing, and marketing of high-reliability frequency and spectrum control products. According to the recent 10-Q, MPTI focuses on providing engineering-centric support throughout the entire product life cycle, from design and prototyping to production and upgrades. With facilities in Orlando, Florida; Yankton, South Dakota; and Noida, India, as well as a sales office in Hong Kong, MtronPTI primarily serves markets such as defense, aerospace, space, and avionics. On October 7, 2022, MtronPTI completed its separation from The LGL Group, becoming an independent, publicly-traded company listed on the NYSE American under the symbol “MPTI.”

Over the last year – not long after its public history began – the share price has more than tripled, significantly outperforming the broad market:

The start of such a strong rally began in August when the company presented its report for the second quarter of the 2023 financial year and significantly exceeded consensus estimates in terms of EPS and revenue:

At the beginning of November, MPTI reported on Q3 FY2023 financial year and once again far exceeded Wall Street forecasts:

In Q3 2023, MtronPTI reported a significant increase in revenue, reaching $10.9 million, a 29.4% rise compared to the same period in FY2022. This growth was even more pronounced YTD, with revenue surging to $30.4 million, a 31.2% increase from the corresponding period last year. The boost in revenue was attributed to robust defense product shipments. The gross margin for Q3 2023 rose to 42.8%, compared to 32.4% in the prior year, driven by a favorable product mix. Backlog increased to $50.3 million at the end of Q3 2023, reflecting higher defense product orders, while supply chain constraints in the defense industry prompted customers to place advance orders.

The company’s EBIT for the nine months of FY2023 was $4,359,000, a notable increase from $2,047,000 last year. Net income for the nine months ended September 30, 2023, rose to $3,416,000 (+112.44% YoY), resulting in basic net income per share of $1.27. Additionally, adjusted EBITDA for Q3 2023 was $2,336,000, a significant increase from $876,000 in Q3 FY2022.

It’s worth noting how quickly MPTI has improved its margins in recent quarters: We see EBIT and net profit margin expansion of 1,121 and 873 basis points in the last quarter [YoY], respectively, which is also higher than in FY2021:

At the same time, unlike many other public companies of a similar size, MPTI has a very strong balance sheet. In the last reporting period, MPTI had a current ratio of ~4.25, while MPTI’s net debt continued to increase due to the increase in cash on the balance sheet [+225% YoY]as the company is not raising debt at all.

MPTI’s robust backlog of $50.3 million [~47% of market cap] is attributed to several key factors, according to the latest IR materials. First, supply chain constraints prompted an acceleration in the order cycle, with customers placing advance orders to secure product deliveries amidst industry challenges. Second, the company experienced market and customer share gains, driven by an expanded product offering. Furthermore, the introduction of new products, specifically the Integrated Microwave Assembly and Planar Filters, contributed to the overall growth of the product line.

I assume that the growth in the order backlog will continue, as the current state of affairs in the addressable markets promises at least a few more years of growing demand.

Click to enlarge

Source: Author’s compilation

But what about the stock’s valuation?

MPTI’s Valuation Analysis

According to Seeking Alpha’s Quant System, MPTI stock has a “C” Valuation grade, which is actually not bad if we recall the firm’s financial growth, but the stock seems far from being called ‘cheap’ at first glance.

Due to the relatively modest size of the company, we only have the opinion of one Wall Street analyst, which forms the consolidated consensus. According to this analyst, MPTI’s EPS will more than double this year and then return to the low teens in FY2024 (and even mid-single digits in FY2025):

At the same time, the same analyst expects MPTI’s revenue to grow even faster in 2024 (and at about the same growth rate in FY2025):

It all looks rather strange to me. If you consider the backlog the company has today and also take into account the lack of debt, I think MPTI should be able to grow its earnings per share much faster than sales. The existing operating leverage will not go away, and the strong demand for end markets could mean some pricing power even for a player as small as MPTI.

So I’m not surprised that MPTI displays multiple beats in EPS so easily.

Judging by the current forecasts, there is more to come in EPS consensus beats, in my opinion. For this reason, I don’t really believe in the current forwarding P/E multiple of ~21.7x, because with continued upward revisions to estimates and actual earnings beats, we should end up seeing a much more modest valuation multiple.

Let’s assume that sales growth in FY2024 is 10% and the net profit margin is at the level of Q3 FY2023 (14.7%). Then even if we assume an increase in shares outstanding to 3 million (+7% YoY), the resulting EPS should be $2.2, which is 25.7% above the current consensus estimate. Then the ~21.7x becomes a FWD P/E ratio of ~17.5x [35.5% lower than the sector’s median value], and that is a very conservative scenario.

The Verdict

Investing in MtronPTI stock involves several important risks that every potential investor should consider. The company is sensitive to market and economic shifts, influenced by factors such as defense spending and geopolitical events. Potential disruptions in the supply chain could impact production, and competition in the technology sector poses challenges. There’s also the risk of technological advancements affecting product relevance. Customer concentration is also a crucial risk to consider: 1 customer generates 29.7% of MPTI’s sales as of Q3 FY2023. Moreover, MtronPTI’s performance is tied to global economic conditions and stock price volatility. Financial risks, including interest rate fluctuations, further contribute to the nuanced landscape of investing in the company’s stock.

Besides, the company’s shares may not be as cheap as I imagine them to be: the company’s FCF yield says it all:

But despite these risks, I think MPTI’s business looks good in the medium term, due to strong industrial demand, the absence of debt on the balance sheet, and potential margin expansion, which I think is still a work in progress.

Do I recommend buying the stock right now? Hard to say – I’m a bit late because the stock has gone through the roof and needs a decent correction to signal a nice entry point. But if we’re talking about the fundamental growth potential, then MPTI’s growth is far from exhausted. I therefore rate the share as a ‘Buy’ today.

Thanks for reading!