CODA - Coda Octopus: Next-Gen Products Driving Earnings Momentum

Summary

• Coda Octopus is benefiting from strong demand for its best-in-class sound underwater technology.
• The stock has rallied in recent months, up more than 40% since September.
• Strong fundamentals including steady growth, underlying profitability, and segment leadership support a positive long-term outlook.

We last covered Coda Octopus Group ( CODA ) way back in 2019 highlighting this profitable and fundamentally solid micro-cap as a niche industry leader. The company specializes in sonar imaging technology with various applications across the military and defense, energy, mining, and offshore construction industry.

The stock hasn't done much since our article , with shares nearly flat from pre-pandemic levels beyond a swing of volatility last year. That being said, our update today recaps some recent developments including a positive earnings trend with climbing margins which is particularly impressive amid the challenging macro backdrop.

Indeed, the stock has gained momentum in recent months based on some optimism that next-gen products and ongoing growth initiatives will help the company further consolidate its market share. In our view, CODA may be still undervalued with the market still considering CODA as an "industrial" player while its high-tech solutions deserve a higher premium.

CODA Key Metrics

The company last reported its Q3 results back in January with EPS of $0.16, up from $0.14 in the period last year. Revenue of $6.3 million, climbed by 8% year-over-year, with management finding success in its "Echoscope" and "Diver Augmented Vision Display" system products.

Another dynamic here is the company's "Services" segment, representing approximately one-third of the business, where sales climbed by an even stronger 14.2%. The top-line momentum coupled with an effort at cost controls and logistical efficiencies helped the operating margin reach 32.3%.

CODA ended the last quarter with $21.3 million in cash against a marginal $100k in long-term debt. The balance sheet position is a strong point in the company's investment profile in our opinion.

With the yet-to-be-reported Q4 results, the company is guiding for 2022 full-year revenue of $17.1 million, up from 5% in 2021 on a comparable basis. Keep in mind that the full-year 2021 earnings included a one-time benefit from the federal stimulus that year which has skewed the financial results while the company is not reconciling the adjusted results.

Nevertheless, the takeaway is that underlying profitability is trending in the right direction. Comments by management have projected optimism for stronger growth going forward.

Some of the catalysts for the company include a push by the U.S. Navy and Department of Defense contractors to integrate more digital and augmented reality solutions. With the Echoscope PIPE Sonars, the big advancement has been "5D and 6D imaging" with onboard processing. The company believes there is a significant opportunity in real-time volumetric imaging compared to legacy solutions that are often 2D images with no depth or mapping.

The selling point becomes the value proposition to customers that can operate faster and more efficiently. In the segments like offshore construction, completing a job in fewer days or weeks can translate into millions of dollars in savings as a positive for project ROIs.

CODA Stock Price Forecast

With a single published Wall Street earnings estimate for CODA projecting 2023 EPS of $0.55 , the stock is trading at a forward P/E of approximately 13x. Annualizing the Q3 results can alternatively arrive at a $0.64 full-year earnings estimate, improving the P/E multiple closer to 11x. Our view is that these multiples are compelling considering the combination of steady growth, recurring profitability, underlying positive free cash flow, zero debt, and the company's position within a unique market segment.

The attraction here is that CODA has a relative diversification to various end-customer sectors while transforming into a robotics tech company by pushing the boundaries of R&D from specialized equipment. All that is to say, shares deserve a higher premium as part of the bullish case for the stock.

From the chart, we're looking at shares approaching a breakout above $7.50 which has represented an important technical level going back to 2020. The interpretation here is that the market recognizes the company's strength which is adding to the momentum.

There is a case to be made that the outlook and fundamentals are stronger now than where the company was in 2021 meaning the cycle high around $10.00 could be back on the table as an upward price target. Our price target implies a market cap approaching $100 million as a milestone benchmark.

The next step will be to follow the upcoming Q4 earnings report, likely to be released in late January or early February, although a date has not yet been confirmed. Updates from management regarding the current operating environment will be key along with margins and cash flow trends as monitoring points. Continued execution should be positive for the stock.

In terms of risks, a break in the stock moving under $6.00 as a level of support would likely reflect a deteriorating of sentiment, signaling a weaker outlook. We mentioned the company's diversified exposure. The oil & gas industry is important for CODA with global majors as current customers. Sharply lower energy prices could impact demand for the investment cycle and CODA equipment. Similarly, the company remains connected to global macro trends. A scenario of a deepening recession worldwide would likely impact sales trends and push shares lower.

For further details see: