Park Aerospace: A Tough Quarter, But Looking To Recover

seekingalpha08-05

Park Aerospace is a leading manufacturer of advanced composite materials for the aerospace industry.The company reported disappointing sales in fiscal Q1 2025, largely attributable to storm damage at ...

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INC"},"translate_title":"Park Aerospace：艰难的季度，但希望复苏","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SAFRY":1,"RTX":1,"PKE":1,"EADSY":1,"GE":1,"5EB.SI":0.66},"content_text":"Park Aerospace is a leading manufacturer of advanced composite materials for the aerospace industry.The company reported disappointing sales in fiscal Q1 2025, largely attributable to storm damage at their Kansas production facility, and operations are back up and running.Park Aerospace remains optimistic about future growth opportunities, specifically as it related to the LEAP-1A engine program for the Airbus narrow-body A320 jets.   Monty Rakusen/DigitalVision via Getty Images When I last covered the aerospace and defense supplier Park Aerospace (NYSE:PKE) in April, I was quite bullish on the outlook for growth, even as shares were not far off 52-week highs. I have been eating my own cooking, so to speak, buying small tranches even near those highs, as well as at lower points as the shares have lost ground in the intervening period. Data by YChartsWith the disappointing performance in the shares, I believe it is a good point to return and re-examine the overall investment thesis and consider what to do going forward. Park Aerospace Fiscal Q1 2025 Overview and Outlook For Q1 of fiscal 2025 (covering basically March through May 2024; technically the quarter ended 6/2/2024), results came in lighter than expected, due primarily to storm damage at their plant in Kansas in the final weeks of the quarter. While production equipment itself was not damaged, roofing and HVAC units were sufficiently damaged to bring a temporary halt to production, and some orders that would have otherwise been shipped in Q1 had to be pushed into Q2. As a secondary impact, Park Aerospace has disclosed that it elects to carry relatively minimal insurance coverage, with higher deductibles, and covers more related expenses whenever they might occur out of its own available cash, leading in this instance to a $1.1 million charge in the quarter due to the storm damage. As the company has been historically abundant in cash and debt free, this is a calculated risk that management is willing to take. In terms of where the actual results came out for the period, revenues were $14.0 million, with 29% gross margins, and earnings from operations (before the costs from storm damage, interest income, or taxes) were $2.1 million. After accounting for these factors, net income was $1.0 million, or $0.05 per share, versus $0.09 per share in Q1 of fiscal 2024. The storm is far and away the major culprit for the quarter's figures not looking good when taken in isolation, however $1.8 million in missed shipments on account of the storm should be recognized revenue in Q2, and things are essentially back and running once again as normal. So while the storm certainly hurt results within the period and took a bite out of cash due to the company's approach to insurance, the fundamental question is about the long-term outlook. For context, the largest single contributor to Park Aerospace's top line is its role in the broader supply chain for a specific set of jet engines used by Airbus (OTCPK:EADSY) for its single-aisle A320 and related family of aircraft. Those engines, the LEAP 1-A series, are manufactured by CFM, a 50/50 joint venture between the French company Safran (OTCPK:SAFRY) and the American company GE Aerospace (GE). Depending on what configuration the Airbus client wants to have, Airbus may also install engines manufactured by Pratt & Whitney, now a subsidiary of RTX Corp. (RTX), however the LEAP 1-A engines currently are the more common configuration. On a side note, the Wall Street Journal recently reported that Airbus is open to the possibility of using Rolls-Royce engines in the future for the A320 jets, but as things stand now, Rolls-Royce is not yet directly competing for this business with CFM and RTX. Park has very limited presence with Boeing (BA) commercial aircraft, so this is all to say that Park Aerospace's fortunes rise and fall to a fairly large degree with Airbus sales of the A320 aircraft, although there are clients within the defense industry, space and other commercial manufacturers as well. Specifically, the Chinese manufacturer COMAC is uses a different configuration of the LEAP engines, the 1-C, for its narrow body C919 aircraft that is attempting to break up the Airbus and Boeing duopoly, and Park is part of that program. For Q1 2025, defense accounted for 40% of revenue, business aircraft was 13%, and commercial aircraft, mostly the LEAP 1-A engines, was 47%, ratios that have held fairly consistent since the passing of the Covid-19 crisis in fiscal 2021. (source: Park Aerospace Q1 2025 investor presentation, slide 13 of 34) So what does the trajectory look like for the LEAP 1-A engines? Airbus has been on a blistering pace overall for the A320 aircraft, perhaps boosted by the quality problems suffered by Boeing. For several quarters, Airbus had a stated goal of reaching 75 units of the A320 per month in 2026, although through 2023 the rate was in the mid-40s, and I believe it has been pushed back to 2027 due to supply-chain constraints. Park's CEO, Brian Shore, shared his perspective on the most recent earning call. Mr. Shore can get pretty wordy, so the following has been heavily condensed and edited [his full comments are available in the transcript]: the A320 aircraft family, that's the big kahuna. . . Airbus has this huge backlog. We're updating this number 7,137. . .the CFM LEAP-1A's market share of firm engine orders, A320neo family of aircraft to 63.5% as of May 31. . . That 63.5% LEAP-1A market share translates into 1,143 LEAP-1A engines per year. What's that wor[th] to Park? . . . They currently are, listen to this, 8,156 firm LEAP-1A engine orders. . . So CFM, they're going to make all those engines. . . So what does that mean to Park? I mean, I don't have to estimate going back to the look at the juggernaut slide, maybe $250 million. . . Those engines are ours. Those engines will be produced. So we can get really hung up on what quarter it is. . . But to us, the key thing is that those engines will be produced and produced with Park materials. Even if you can quibble with some of the figures and uncertainties, the overall confidence that the LEAP-1A business will be a strong driver of Park's results for a very long time to come is about as high a level of certainty there can be in the future. I think there is little doubt that these volumes will rise from the existing production levels, even if not as aggressively as Airbus would like. PKE Stock Valuation With the unfortunate performance for in Q1 impacting earnings on a trailing twelve-month basis, coming in at just $0.33 over the last 12 months. As a result, the P/E ratio on that trailing basis is rather eye-watering 38x. Instead of looking back, though, considering the forward potential should put things into clearer perspective. There are no analyst forecasts on earnings, but management provides historical adjusted EBITDA along with guidance. For fiscal 2024 (12 months ended 3/3/2024), adjusted EBITDA was $11.0 million, versus guidance for fiscal 2025 to be between $13 and $15 million. At the current market cap of $257 million, cash on hand of $74 million and no debt, Park has an enterprise value is around $183 million. That converts to an EV / adjusted EBITDA on a trailing basis is 16.6x, but drops to 13.1x on a forward basis when taking the mid-point of adjusted EBITDA guidance of $14 million. With the EV having dropped with the retreat in the share price while adjusted EBITDA is slated to strengthen looks to be a winning combination at first glance. I have not been successful in finding what I consider one sector peer that is of a similar size with positive EBITDA or earnings that makes for a really good comparison, as the handful of ones that are less $1 billion in market cap are mostly unprofitable at this stage.   Aerospace sector select EV / EBITDA multiples (Author's spreadsheet (data from Seeking Alpha)) The valuation is fairly middle of the road here as far its sector is concerned, assuming Park reaches the midpoint EBITDA of $14 million this fiscal year. But in addition to just the face value of the EV / EBITDA multiple, what I like about this set-up from a valuation standpoint is four-fold:  Park is small but mighty - even with a difficult recent quarter, it maintains discipline and generated earnings, and has been investing into its future capacity due to all the signs pointing to growth in time. With the recent pullback in the shares, investors can buy into the current results and future growth profile at a very reasonable valuation. The company has no overhang from debt. While other companies have to play the financial engineering game from time to time to deal with their debt maturities, none of Park's cash flows goes to interest expense. Finally, Park balances rewarding its shareholders with a dividend that right now yields almost 4% without sacrificing the balance sheet or neglecting to invest properly back into its business  The riskiest aspect confronting Park Aerospace, in my view, is that to a certain degree it's growth depends largely on Airbus successfully ramping up its production. However, the ability of Airbus to pump out more jets in the coming years could well be constrained by the pace its suppliers are able to maintain - in other words, if Airbus can only realistically go as fast as its slowest supplier, then so too could Park be limited by inefficiencies elsewhere in the supply chain that are far beyond its ability to control. In effect, the growth narrative, while tantalizing, could be perpetually \"just around the corner\" and never quite actually arrive. There are other risks to consider as well. Spending on defense has wide range of variables, from the geopolitics of the situations in Ukraine to the Middle East to the South China Sea and what direction those tensions will go, to the unknown impact of a new US presidential administration and new Congress to be seated in January and budget priorities for defense spending. Park could certainly be adversely impacted by decisions in the National Defense Authorization Act, depending on what the Congress ultimately approves and how that filters down to the specific defense-related projects that Park supplies. Concluding Thoughts In spite of the risks, I believe the overall balance of risk to reward at the moment continues to favor reward, from the combination of valuation, dividend yield, and growth profile that I expect to develop. No growth is 100% assured, of course, though I think that the expected growth in this case is clearly accurate in terms of direction, if not precise in how it will ultimately play out. Alternatively, growth can be its own challenge, and for Park to be able to meet demand the greater demand could be a turbulent ride.  Personally, I've been long shares in Park Aerospace, initiating a small position in January 2020. I have continued to add to my position over the last 4 years without selling any shares, including purchases near the 52-week high back in April, but also as the shares have pulled back over the last 5 months. Since I have not yet accumulated a full position in Park, I anticipate that I will continue to add somewhat more aggressively while shares are under $13.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2457172901"}