Cash flow yet to help Cemtrex to be attractive
Stock: Cemtrex (ticker: CETX, CETXP)
Cemtrex, a world-leading industrial and manufacturing company, recently provided announced its record date for its preferred stock (ticker CETXP). For one thing, the preferred stock has dropped like a hot potato or 33.5% since its issuance early this year. More attractive is this preferred stock is paying cumulative dividends at the rate of 10% of the purchase price per year (10-K). Having traded at $6.65 a share and a purchase price of $10 already indicated a good amount of assured safety, and the double-digit percentage cumulative dividend payouts on top should surely make a conservative investor salivating at this point.
But why? Why has the preferred stock fallen to such bargains.
One reason could be the company’s recent blunder whereby it has been subjected to serious disservice to its shareholders. According to a Seeking Alpha article published in February, that Cemtrex’s founder, Aron Govil, was secretly paying promoters via an undisclosed entity to promote the company’s share price and worst, the article claimed that Cemtrex pays its auditors $20,000 per year to sign off financials.
According to filings, approximately 50.0% of Cemtrex’s outstanding voting equity is beneficially held by combination of Aron Govil and Saagar Govil the company’s CEO. This ownership makes it impossible for the public stockholders to influence the affairs of the company.
Meanwhile, the New York-based company reported a rather still impressive 54% year over year growth in its revenue to $87.7 million for the recent nine months operations that ended in June while having a recorded a contrasting 9.6% drop in profits to $2.7 million.
Cemtrex appeared to have recorded higher cost of revenue, 50% year over year, and another 70% higher operating expenses in the recent period resulting to lower profits in the period.
According to filings, Cemtrex was incorporated on April 27, 1998, in the state of Delaware under the name “Diversified American Holdings, Inc.” The Company subsequently changed its name to “Cemtrex Inc.” on December 16, 2004.
Cemtrex is a leading diversified technology company that operates in a wide array of business segments and provides solutions to meet today’s industrial and manufacturing challenges.
The company provides electronic manufacturing services of advanced electric system assemblies, provides instruments & emission monitors for industrial processes, and provides industrial air filtration & environmental control systems.
In 2015, Cemtrex acquired Advanced Industrial Services Inc, an installer of high precision equipment in a wide variety of industrial markets such as automotive, printing and graphics, industrial automation, packaging and chemicals, for a purchase price of approximately $7.7 million.
In 2016, the company acquired at the purchase of approximately €9 million a machinery and equipment, and the electronics manufacturing and logistics businesses of Periscope, GmbH. Periscope is focused on electronic manufacturing services primarily for the major German automotive manufacturers, including Tier 1 suppliers in the industry, as well as for industries like telecommunications, industrial goods, luxury consumer products, display technology, and other industrial OEMs.
In early September, Cemtrex announced an exchange offer to acquire Key Tronic Corporation in an exchange offer. Key Tronic has similar business with Cemtrex’s EMS business and is engaged in designing, prototyping and manufacturing electronic components in the most advanced and cutting-edge technologies.
Sales and profits
In the past three years, Cemtrex recorded an impressive 90% revenue growth average, profit rise average of 159%, and profit margin average of 5.3% (Morningstar)
Cash, debt and book value (equity)
As of June, Cemtrex had $13 million in cash, and $13 million in debt with debt-equity ratio 1.5 times compared to 0.35 times a year earlier. Overall equity rose $24 million to $37 million while debt fell by $7 million.
In the recent nine months operations, Cemtrex had cash outflow from operations of $1.16 million compared to $4.9 million a year earlier. Cash outflow was mainly a result of higher outflows in relation to the company’s deferred revenue, inventory, sales tax payable, and accrued expenses.
Capital expenditures were $642 thousand resulting in free cash outflow of $1.8 million compared to $4.52 million a year earlier.
Meanwhile, Cemtrex was able to raise $12.82 million in net proceeds from subscription rights offering and allocated $1.8 million in debt repayments and $528.6 thousand in dividend payouts in the period.
The cash flow summary
In the past three years, Cemtrex allocated about $11 million in capital expenditures, raised $23 million in debt (net repayments and other financing activities), and generated $0 free cash flow.
Setting aside possible and potential damaging reputational claims as has been provided, Cemtrex’s recent strong growth may also be supported by the company’s recent acquisition activities.
Interestingly enough, Cemtrex seemed to exhibit prudence while having taken no goodwill/intangibles in its balance sheet. Cemtrex also has not generated attractive free cash flow figures in recent years.
Analysts had an average buy recommendation on Cemtrex with a target price of $4.50 per share vs. $3.21 at the time writing. Asking a 40% discount from the average revenue estimates this fiscal year multiplied with three-year PS average indicated a per share figure of $3.4.
In summary, Cemtrex is a hold.
Saagar Govil, Chairman and CEO of Cemtrex (second quarter)
“We reported a 61% increase in total revenue to $30.5 million for the second quarter of fiscal year 2017. This growth was driven organically and through the acquisitions we completed within the last year. There are significant opportunities for us to continue to grow in fiscal 2017 and beyond as we make additional strategic investments in our existing businesses and look to complete synergistic acquisitions.”
“Looking ahead, customers’ programs are steadily filling our industrial and electronics manufacturing pipelines for the remainder of the year, putting us on track to maintain planned growth for the balance of fiscal year 2017.”
“As Cemtrex continues to grow, we are positioned to build shareholder value even further. We do not believe the valuation of the Company’s stock fully represents the progress we have made over the past year. As a result, the Board of Directors utilized different financial tools, including a stock buyback program and paying dividends to common and preferred shareholders. We believe these actions benefit our existing shareholders, while also attracting a broader shareholder base.”
Disclosure: I do not have shares in any of the companies mentioned.