Park Aerospace Corporation (New York Stock Exchange: PKE) is an aerospace company that manufactures solutions and hot-melt advanced composite materials for developing composite structures for the global aviation market. These materials are commonly used to create primary and secondary. Jet engine structures, transport planes, military planes and various aircraft models.
The company manufactures composite parts and structures at its manufacturing unit located in Newton, using proprietary composite materials such as Sigmastruts and Alphastruts. In addition, the composite materials produced by the company are used to produce lightweight, high-strength structures. These materials are generally made with very specific and proprietary resin formulations. However, despite ownership over that period, performance declined due to intense competition, price pressure and changing customer preferences for new technology.
Additionally, the company works with aerospace OEMs and aircraft manufacturers. Generally, these manufacturers are looking for low-cost providers to keep their margins low. As a result, Park Aerospace is suffering from significant pricing pressure.
In 2019, management decided to expand the manufacturing facility in Newton, which is underway. The 90,000-square-foot expansion is expected to double his existing facility. The expansion includes new resin mixing and delivery systems, new hot melt film and tape manufacturing lines, new R&D labs, and a range of related capabilities that can enhance business performance. The company hopes to expand its business, but its consistently declining revenues and profitability tell a different story.
Stock prices continue to fall due to poor performance. Since its peak in 2011, the stock has lost nearly 57% of its value to date, leading to significant destruction of shareholder value.
Although the stock is currently declining, the company’s strong financial position has allowed it to trade at a significantly higher multiple of 35 times earnings. And with profitability declining, it could take a very long time to restore profit margins. I believe this stock does not offer a margin of safety from this price. Therefore, I assign the stock a sell rating.
past record
Over the past decade, revenue has consistently declined from $193 million in 2012 to approximately $53 million in 2022. Profit margins have also declined significantly over the same period, reaching $8.4 million by 2021. However, it is commendable that the number of shares outstanding has remained at about the same level despite the declining business prospects.
Despite low margins, the company has no long-term debt and has over $102 million in cash. This indicates that the company’s financial position is fairly strong. Operating cash flow was positive during the same period, and the company paid back cash generated through large dividends.
Having a consistent cash flow history along with strong liquidity gives a business model great strength. As a result, the stock is trading at significantly higher multiples despite a significantly worsening business model.
Business model strengths
Despite volatile performance, the company remains financially sound. The company is debt-free and has significant liquid assets that significantly enhance its business model. At a time when various aerospace manufacturers were struggling with huge debt burdens, having such strong liquid assets gave the company an edge over its competitors.
The company offers composites made from proprietary specific resin formulations, and such ownership has protected profitability in a highly competitive environment.
Risk factor
Although our business performance continues to decline, it may deteriorate further due to intensifying competition and recent troubles in the airline industry. Also, if the company fails to maintain its profit margins, it must suffer losses that can affect its share price.
The composites industry is highly competitive, and in most cases the company has to work with aircraft manufacturers. If customer demand changes for new and innovative products, the company can incur huge costs to develop new products.
With our top 10 customers accounting for more than 70% of total revenue over the period, and approximately 27% of total revenue coming from General Electric alone in 2021, such high customer concentration puts our business model at risk. may expose you to significant risks. The airline industry is fairly cyclical and has thin margins, so losing a key customer can have a significant impact on your business model. Also, during cyclical economic downturns, these major airlines could exert high pricing pressures that could hurt their profitability.
Recent development
In recent years, the aviation industry has faced a major backdrop due to high oil prices, low fares and declining passenger numbers. As a result, airline manufacturers are in trouble. But in the case of Park Aviation, despite significant problems, the company has maintained significant levels of revenue and margins.
Revenue increased slightly to about $13 million in the most recent quarter, but higher sales commissions pushed net income down 10% to $1.8 million. This shows that business models that can remain profitable even in the face of adversity are very strong. The company also closed out the quarter with more than $98 million of his securities.
The company is focusing on supply chain issues and expects to see higher earnings in the coming quarters, but the cyclical nature of the airline industry could undermine its performance. It’s trading at $8 million, but has a net profit of about $8 million, suggesting it’s trading at about 35 times its earnings in 2021. The biggest concern is the continuing decline in operating income. Therefore, I assign a sell rating to the stock.