TAYD - Taylor Devices

[Guest Schwab711]

Company Description: They make extremely heavy-duty shock absorbers (known as "seismic dampers"), primarily for bridges, skyscrapers, and other large structures. They have a global duopoly for these types of shock absorbers. TAYD probably has ~50% of the market, their competitor has ~45%, and every other installation probably accounts for maybe 5%. They also make shock absorbers for some aircraft, including recent contracts for the shock absorbers on the MQ-9/Reapers. The Reapers are the primary bomb-deploying UAV (drone) for the US military. This is probably the best publicly-traded drone supplier I've been able to find.

 

I really like the seismic damper business for large civil structures since I think it should have a very light secular tailwind over the next few decades as the state of California and government or sensitive buildings begin to install these as default policy (as opposed to retrofitting buildings, as they have historically done). The strong USD is really hurting this part of the business, despite record revenue/profit in FY 2015.

 

It's hard to find information on the drone contracts as this is still a very sensitive aircraft fleet for the US military. I have previously found some military contracts that lead me to believe that they are the sole-source provider for Reapers (or essentially sole-source) and the Reapers will comprise ~80% of the military's UAV fleet. Like the shock absorbers for civil structures, although there is strong foreign competition, TAYD is the US-leader for both applications which gives them a near-monopoly on US government contracts.

 

Valuation:

The last nine months have been tough as the backlog declined severely (it seems to be due to the USD, but I didn't make it to the annual report to hear management's thoughts). Company has ~$6m in cash and no debt. They do not pay a dividend (and probably won't). They do buyback shares when they believe they are undervalued.

 

They have invested a lot in new production and testing facilities and new equipment in the past few years. I'm not highlighting P/FCF metrics for that reason. It's very likely that D+A > CapEx in 2019 and beyond, ceteris paribus.

 

Management mentioned that margins should see slight improvement as a result, prior to any operating leverage (if realized) from increased capacity. Supposedly they expanded their production/testing facilities because of numerous customer requests.

 

On TTM basis (ROIC = ROE since no debt):

EV/EBITDA: 8.2x

P/E (Ex-cash): 12.8x

P/E: 14.8x

ROIC/ROE: >11%

 

For FY2016 (ended 5/31/16):

EV/EBITDA: 6.6x

P/E (Ex-cash): 10.4x

P/E: 11.8x

ROIC/ROE: 14%

 

Not incredibly cheap but I think the shares trade below FV and both of their main revenue streams (discussed above; account for ~90%+ revenue) have strong growth outlooks looking out 5-10 years, imo.

 

I don't have the numbers in front of me but their NTM revenue is strongly correlated (~0.9, IIRC) with their backlog. The backlog is growing slightly lately. New Reaper orders should be received in the next 6-9 months (if the past pattern is extrapolated). Either way,  I think the lowest we see revenue/profit fall to is $25m/$2.3m, if the past is any indication.

 

Catalysts/Tailwinds:

I see potential catalysts as the following: 1) the USD falls, 2) infrastructure spending increases, 3) the military commits to expanding their UAV fleet (especially Reapers), 4) the corporate tax rate falls to 15%-25%, and/or 5) Los Angeles enforces (and hopefully the initiative expands to all of CA) their mandate to retrofit older structures to withstand stronger earthquakes.

 

The company also has some extremely interesting patents that are currently not being monetized. I think these provide some interesting options. I've heard of the NSS prior to knowing who TAYD was. I'm not an engineer, but I've heard that a lot of civil folks were excited about the potential of the NSS. TAYD has 2 patents at present with a couple more on the way (hopefully). I think it shows that they are still at the cutting-edge of their field.

Negative Stiffness Systems (NSS):

http://seesl.buffalo.edu/projects/neesadaptstruct/

https://mceer.buffalo.edu/pdf/report/13-0004.pdf

 

 

Other:

I think future "earnings power" has grown this year, despite the drop in sales and profit. The company is run by a 2nd generation CEO and his son (grandson of the founder) is now a SVP. Insiders only own 6.5% but I don't see this as an acquisition target because of the family-like nature of the business.

 

Their seismic dampers in action:

 

Installations of seismic dampers:

http://taylordevices.com/pdf/2016/01Jan/201601JanStructuralApplicationChart-2015.pdf

 

For you NASA fans, this company started with the CEO's father inventing the device to allow the arms that held the Apollo Project spacecrafts in place prior to lift off. The dampers prevented the arms for swinging backwards uncontrollably at the zero-count. Cool stuff.

[netnet]

Does the company with 45% of the damper market behave rationally?  Is that company public?

[Guest Schwab711]

Does the company with 45% of the damper market behave rationally?  Is that company public?

 

I'm pretty sure they compete against Dynamic Isolation Systems for large civil projects

http://uk.reuters.com/business/quotes/5614.T/key-developments/article/3350397

 

And for small/medium sized civil structures they compete against Enidine (ITT) and DIS.

 

All I could do is guess on the rationality. There are alternatives to seismic dampers, including not using any type of additional damper. For many large projects dampers are the cheapest and most aesthetically pleasing solution (from what I understand).