PARK AEROSPACE CORP PKE
July 29, 2020 - 9:04pm EST by
BJG
2020 2021
Price: 11.23 EPS 0 0
Shares Out. (in M): 20 P/E 0 0
Market Cap (in $M): 229 P/FCF 0 0
Net Debt (in $M): 121 EBIT 0 0
TEV ($): 108 TEV/EBIT 0 0

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Description

Park Aerospace is a owner-operated niche aerospace supplier business. Park Electrochemical since 1960, the company changed its name to Park Aerospace in July 2019, following the December 2018 sale of its Electronics Business which, even after a dividend, has left the company with a substantial net cash position which is more than half of Market Cap and positions the company well to acquire in the beaten down aerospace supply chain.

Shares represent the opportunity for a 3-5 year double while clipping a 3.5% yield, with minimal "zero" risk given net cash is more than half of market cap, and add'l catalyst in the form of a potential acquisition(s) during the largest aerospace industry downturn in our lifetimes. 

As of Q1 2021, for the period ending May 31, 2020, PKE had 20.4MM shares outstanding, trading at ~$11/share as of this writing, for a market cap of $224MM.  Cash and marketable securities amounted to $121MM at quarter end and the company had no debt for an EV of $103MM. TTM revenues were $57MM, EBITDA $14.7MM, and $13MM in EBIT. Operating Cash Flows were $7.3MM offset entirely by CapEx - partly due to the ~$20.5MM CapEx budget for the new facility. Regular Dividends to shareholders are $8MM annually. The new facility would bring total capacity revenue generation to ~$108MM.

In the most recent quarter ending May 31, 2020 (and beginning March 1), Revenues were $12.2MM versus $15MM a year ago. EBIT was down by a little less than a million YoY to $2.0MM, and free cash flow for the quarter was breakeven net of both capex and dividends paid. 

Prior to COVID, the company was guiding to Fiscal 2024 (period ending 3/1/2024) $97MM in Revenues and $26MM in EBITDA based on existing programs and their anticipated ramp ups. Programs that Park was attempting to land - that they haven't yet - are not included in company guidance. 

The company to date has no recent history of acquisitions, but has built an exceptional track record of landing on certain programs across commercial and military aerospace. Management has expressed interest in an acquisition at the right price and under the right scenario (where they could add value operationally). The company has more than $100MM in cash to contribute to an acquisition and has experience operating two businesses in two separate industries with two entirely different manfucturing locations and customer lists. Park has indicated any acquistion would be likely be in aerospace and possibly value-added niche players not unlike their current operations. Allegedly, some potential deal flow comes to them through larger OEMs and larger suppliers who appreciate Park's ability to meet deadlines and quality. These materials and structures have certain high-value attributes such as vibration dapening, lightning structure protection, and low weight high strength. The company also produces material for rocket nozzles and radome use cases.

Business

Park wedged its way into pure play aerospace by building a stand-alone plant a little more than 10 years ago, after having had success selling to some aerospace customers using its composite material know-how. Park is anticipating completing a second production facility (adjacent to the existing plant, in Newton, KS) in early 2021. While doubling capacity, some is allocated as redundant capacity to appease the larger OEM buyers. 

Park produces hot-melt composite materials that are used in various Aerospace programs. Engine nacelles, reverse thrusters, struts are some of the product use cases. The company's materials are manufactured using hand lay-up or automated fiber placement. Some material is sourced from Hexcel - making HXL both a competitor and supplier. 

Park's major programs:

  • 747-8 GEnx 2B engines
  • A320neo/321neo/321XLR with LEAP 1A engines
  • A321neo with LEAP 1A engines
  • Comac 919 with LEAP-1C Engines (major initiative for China as they seek to enter the larger single-aisle commercial aircraft space)
  • Comac ARJ with CF34-10A Engines
  • Bombardier Global 7500 with Passport 20 Engines 

Park indicated in January 2020 that major jet programs weren't expected to fully ramp until calendar 2025 based on customer-provided forecasts.

Revenue breakdown at Fiscal 2020 were:

  • 47% Commercial
  • 35% Military
  • 18% Business (Bombardier Passport 20 engine as one of the key products)

Fiscal Q1 2020 Revenues were as follows, with a larger share to military driven by declining Commercial but also growing Military (Kratos) volumes:

  • 35% Commercial (annualized decline of approx. $11MM or -40%)
  • 53% Military (annualized increase of approx. $5MM or +23%)
  • 12% Business (annualized decline of approx. $5MM or -46%)

Some of the declines were exacerbated due to destocking of excess inventory that had accumulated in the supply chain from higher run rates, as Airbus' A320 program had pinged suppliers several times to ramp and indicate further ramp ups of production, as single-aisle orders were increasing at the same time the only real competitor - 737 Max - was on hold. 

Most notable within Military is Kratos' Valkyrie program. The Air Force is particularly interested in creating a program where Unmanned Aerial Vehicles (UAVs) assist a host piloted jet. Several+ UAVs would tag along with a single F-35, for example. To date, Kratos has realized no revenues from Valkyrie but has indicated it could be one of its largest programs. In early July, Kratos landed part of the Air Force's $400MM, five year, indefinite quantity contract. Park has Kratos as a top 5 customer as of Fiscal Q1 2021. Kratos has been listed as a Top 5 customer since Fiscal Q2 2020 (ending 9/1/19), well before any large Valkyrie ramp. Park has typically only included in long-term guidance firm indications from customers. Prior to the recent Skyborg announcement, Kratos had not included material Valkyrie revenues in their guidance.

Park's materials are also on Northrop's Global Hawk (a drone currently in use) and its Triton UAV. 

The Air Force's Skyborg program is quoted as the one of the most "far reaching" tech program that will implement AI for battle field management. One of the criteria is that the UAVs must be relatively low cost and expendible in combat situations. 

In the Commercial space, Park is on both the Airbus and in-progress Chinese Comac engines programs. They have no exposure to the 737 Max and no wide body exposure other than the now cargo-oriented mature 747-8 program. It's anticipated that due to quarantine and possibly geopolitical issues, global air travel will recover well after domestic - which is largely single-aisle. 

Park has shown the ability to deliver on revenues and margins over multi-year periods, compounding revenues at ~13% per annum. The COVID commercial travel impact provides the opportunity to buy a well managed and well capitalized firm that, at no cash burn while you wait, and will recover with the industry, with a potential acquisition on the cheap, while delivering gains in military segment.

Ownership

Park was founded by the late Jerry Shore in 1954. His son Brian Shore has been CEO since 1996. Brian Shore is 68 years of age. Brian has two siblings who have equity shares in the company and are also beneficiaries of the Shore's trust. Brian's nephew, Ben, age 32, joined the company in October 2017. 

By all accounts, Brian is highly respectible person, strongly aligned manager, trustworthy fiduciary of shareholders capital, and importantly, he's anything but complacent. The easy decision at the time was to hold course.

Brian voluntarily reduced his salary over the past two years and historically, had foregone his bonus or donated it to charity (2008-2014).

"Mr. Shore’s voluntary reduction of his annual salary in the 2021 fiscal year was intended to pay for the portion of the increase, in such fiscal year, to the cost of the Company’s medical insurance plan which otherwise would need to be paid for by the Company’s employees through increases to their weekly medical insurance plan contributions." https://www.sec.gov/Archives/edgar/data/76267/000110465920074427/tm2022568-1_def14a.htm

Rewind to 2007. Brian was ~55 and 11 years into a CEO job where he and his family had substantial ownership. At the time, the company's revenues were mostly from the Electronics Business with printed circuit board materials generating >90% of the company's $220MM in annual revenues. On the company's fiscal Q4 2007 call (early calendar 2007), Brian announced to shareholders the company's intent to build a stand-alone aerospace facility in Kansas. The facility was completed in early 2009. The next few years were rough for the aerospace segment and specifically the Newton, Kansas facility. Losses ran at about a half million to $1MM per quarter over the next several years. In Q1 2015 (early 2014), the Kansas facility flipped to a slight profit. During fiscal 2015, the company began producing and supplying reverse thruster composite material for the Boeing 747-8, a legacy program where they supplanted an incumbant. 12 Aircrafts per year were being produced, mostly for cargo, and Park was/is sole source for its material.

The Shore family (Brian and his two siblings), directly and through family trusts, own approx. 2.1 million shares or just over 10 percent. The two siblings that have no direct relationship with the company other than share ownership, collectively own 925,000 shares directly plus their respective interests in trusts totaling 424,896 (that is reported an Indirect under Brian Shore on proxies and Shared ownership on Form 4s).

PKE also has a handful of institutional funds that span from factor ETFs (Dimensional Funds at 5.8%), maybe fundamental maybe passive BlackRock at 15%, Vanguard at 6.8%, activist/small cap fund Raging Capital at 6.2%, and Renaissance at 7.5%. Raging Cap is closing its doors and will gradually wind down remaining positions (per the firm's form ADV https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=642158) . Raging sent a letter to managing suggesting a more aggressive buyback approach to which management responded that it welcomes shareholder input and ideas and has a buyback authorization in place, but that it considers any buyback as part of a broader allocation decision.

Raging's position is less than 10 days of average daily volume so not a major overhang. 

747 Program Not a Material Risk

One of the things that can catch aerospace investors off guard is when one program is a large piece of revenues and/or higher margin, and then that program shutters sooner than investors anticipated. One day, Boeing will cease 747-8 production. While this program put Park's stand-alone Newton, KS facility on the map and provided steady revenues and throughput, the loss of the program will not be material to the long-term Park story.

  • 747-8 is a small piece of (Pre-covid) run-rate revenues (probably $1MM per quarter give or take) and likely low margin because they replaced an incumbant and its part of a much larger long-term pricing deal, and at the time the company had suffered several years of startup operating losses in building and bringing on line its new facility. 
  • As of Q4 2015, the 747-8 was full ramped up.
  • At that time, the A320 program was in the works, with mgmt suggesting volume ramp not until 2017-2018. In other words, the nascent A320 was not material to Park at the time.
  • Total Company sales in fiscal 2015 (period ending March 1, 2015) was $162MM. Aerospace and related sales were $36MM in that same fiscal period and $8.8MM in Q4 (compared to $8.0MM in Q4 of the prior fiscal year).  The first 747 product shipment was February 2014.
  • If the full Q4 14 vs Q4 15 was due solely to 747-8, that's $800,000. Production at the time would have been for around 48 engines per year (12 planes per year) or $66,000 per engine, which seems light. If the figure is 2x that amount, or $132,000/engine, the revenue contribution of 747 orders would be around $3.2MM post-2016.
  • Boeing announced in early 2016 that by the end of the year, 747-8 production would be decreased to 6 per year. ~16 per year were being made before a step down to 12 per year that was implemented in early 2016. https://www.sec.gov/Archives/edgar/data/12927/000001292716000086/a201601jan21exhibit991.htm
  • Alternatively, aerospace revenues grew from $30.4MM in fiscal 2014 to $35.6MM. If that is entirely attirbuted to 747-8 engine composite material, that figure would be about $2.5MM given boeing has since cut its production in half (actually more than half, by 63% from 16 per year to 6 per year).

Valuation

Even with a calendar 2023 short-haul recovery now forecasted by IATA (approx. fiscal 2024 for Park), the ramp cycle would potentially will be pushed back but possibly not by the same time extent. Using low teens to mid teens EBITDA multiples (12.5x to 15x) - which is where aero materials suppliers traded pre-COVID - and pushing Park's long-term forecast out by a full two years, equity price returns would be in the 60-80% range through Calendar 2024, with another 3.5% clipped per annum from the dividend. In the March 2019-Feb 2020 12-month period leading up to COVID, Park was trading in the 13.5x to 18.5x range. An uplift from an accretive acquisiton purchased during a major industry downturn could further add to shareholder returns. Share count dilution is minimal. Options totaling 2% of total share count have been granted (both vested and unvested) at an average price of $7.76 and a range of $6.20 to $17.63. The company has a history of being rigid on share count and a small buyback is currently being executed. 

Pre-COVID Long-term Forecast

Share Price Post COVID (I use $100MM net cash because the company has remaining capex committed on the facility expansion and some tax true ups)

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Aerospace recovery, one day, and Park will be around to particpate in it - tough to go bankrupt when net cash 
  • Acquisition with the company's large excess cash hoard
  • Continued execution in non-Commercial space, such as recent military win with Kratos on the Valkyrie UAV program (that was recently awarded part of the Air Force's initial Skyborg contract)
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