ULBI - Ultralife: Stock To Outperform With Growth From Multiple Industries

2023-10-11 23:01:55 ET

Summary

• Ultralife's strong revenue and earnings growth can drive the stock to above-average gains.
• The valuation is reasonable, leaving room for upside for the stock.
• Ultralife is poised to benefit over multiple years from the expected industry growth for lithium-ion batteries.

In my ongoing quest to find small under-covered growing companies, I have discovered Ultralife ( ULBI ). Ultralife is known as a power company that produces lithium-ion batteries and power supplies for a variety of critical applications where reliability is paramount. The company also provides communications systems for military operations.

Ultralife looks intriguing from an investment standpoint as the company has strong expected growth and a reasonable valuation. Given these factors, the stock has a good chance to outperform over the long-term.

About Ultralife

Ultralife produces lithium-ion batteries/power supplies and for a variety of applications including: medical, energy, safety/security, industrial, and government/defense. ULBI also provides products for communications systems. It is important for Ultralife's products to have strong reliability because power failure is not an option for these critical applications.

In the medical field, Ultralife supplies a variety of batteries for use in powered medical carts & beds, defibrillators, RFID tags/units, blood analyzers, medical delivery pumps/devices, portable ultrasound/CPAP/BIPAP machines, TENs units/RTLS, remote patient monitoring, handheld dental devices, powered surgical drills, surgical headlights, and digital x-ray imaging.

In the Energy field Ultralife supplies products for energy storage, disaster relief, remote locations/portable lighting, military telecon, energy stand-by generation, marine applications, emergency response, back-up power, renewable/off-grid applications, construction sites, forward operating bases, and UPS replacement.

For safety/security, Ultralife provides products for smoke/carbon monoxide detectors, intrusion detection systems, smart security cards, bank theft tracking systems, emergency lighting systems, search & rescue devices, RFID, and backup power.

In the Industrial field, the company has solutions for smart/utility metering, toll pass/telemetry, pipeline inspection, GPS/asset tracking, tire pressure monitoring systems, industrial motive, personal transport, and robotics.

For government/military, Ultralife provides soldier-worn power for communications, portable vehicle-based charging systems, emergency rescue power, detectors/imaging, surveillance, back-up power, AUVs/UUVs, robotics, rugged portable electronics, and communications systems.

Most of these applications have a critical need to be reliable without failures. Ultralife is a key provider of these solutions, giving the company strong ongoing growth potential.

Growth Catalysts

At the end of Q2 2023, Ultralife had a record backlog of $111 million, which was 2.6% higher than at the end of Q1 2023 and 40% higher than Q2 2022. For context, the amount of the backlog is 77% of Ultralife's trailing 12 month revenue of $144 million . The increase in the backlog will help drive revenue growth in future quarters.

The company achieved a 33% increase in consolidated revenue in Q2 2023 to $42.7 million over Q2 2022. Ultralife had strong growth in both of its segments. The Battery & Energy products segment achieved a 12.3% revenue increase in Q2 while the Communications Products segment had a four-fold increase from $2 million in Q2 2022 to $8.8 million in Q2 2023.

Ultralife achieved double-digit revenue strength in government/defense sales, medical battery sales, and oil & gas sales. However, this was offset by a decline in commercial sales (mostly in China due to the timing of some industrial sales).

The backlog for the Battery & Energy segment increased 12.1%, which provides some insight into where growth will come in the near future. The Communications Systems segment backlog decreased 39%. This decline was a result of Ultralife working on existing orders and waiting to secure the next round of defense program orders. The Battery & Energy segment is what matters most for Ultralife as it comprises 95% of total revenue . Therefore, the decline in the Communications Systems segment's backlog is not a huge factor - it is just more of a timing issue.

The market for Ultralife's lithium-ion batteries looks strong going forward. The global lithium-ion battery market is expected to grow at about 19.3% per year to reach $274 billion by 2030. That strong double-digit growth is likely to provide a nice tailwind for Ultralife's lithium-ion battery products.

Ultralife is also in the early stages of making operational improvements to increase margins. If successful, these initiatives can help drive margin expansion for accelerated earnings growth. One of these initiatives is optimal pricing, which can help drive increases in gross margin. Other initiatives are to improve the process of launching new products and transitioning to higher volume production with an optimal design for manufacturing and lean principles.

Another strategy for growth is an effort to capitalize on the electrification and 5G markets. ULBI is seeking niche applications in these areas that will leverage the company's competitive advantages, cell design expertise, and power system capabilities.

Reasonable Valuation

I think the price/sales ratio is the best valuation metric to use for Ultralife. The reason for this is because the company just had two years of negative net income in 2021 and 2022. The price/sales ratio will allow investors to analyze valuation in terms of revenue instead of earnings which might be skewed due to the transition from negative to positive net income.

Another reason for using the price/sales ratio is because Ultralife is expected to grow revenue significantly faster than the sector. Ultralife is expected to grow revenue from 16% to 20% for the full year of 2023 as compared to the sector's expected growth of about 8%.

Ultralife is trading with a trailing price/sales of 1.17x which is lower than the sector median of 1.36x. ULBI's forward price/sales is 1.1x which is also lower than the sector median of 1.33x. This reasonable valuation level leaves room for the stock to run higher as Ultralife continues to grow.

Ultralife is expected to follow up 2023's strong revenue growth with a 10.7% revenue increase to $169.5 million in 2024. The slower pace of revenue growth in 2024 as compared to 2023 could be the result of the effect of higher interest rates dampening demand for large orders. However, revenue growth over 10% is still strong and above-average.

EPS for 2023 is expected to be a positive $0.45 after a negative $0.01 from 2022. EPS is expected to increase by 51% to $0.68 in 2024. These revenue and earnings gains are likely to drive the stock for strong gains if expectations are met or exceeded. Investors should be pleased to see Ultralife return to profitability.

Technical Perspective

The stock price had a great run higher this year. It appears that the price might be about to make another break higher. The MACD (middle of chart) has been consolidating, showing a drop off in momentum after the sharp run higher from the summer. However, the purple RSI line (bottom of chart) remains in bullish mode as it stayed above the 50 level. The RSI is currently bouncing higher from the 50 level, which could indicate that a continuation move higher could be on the table.

Balance Sheet/Cash Flow

Ultralife has $8.3 million in total cash and $22.6 million in total debt (excluding lease obligations) for net debt of $14.3 million. I typically like to see zero net debt. However, Ultralife does have to invest in growing the business. So, taking on some debt can help fuel future growth.

Ultralife has 3x more current assets than current liabilities and 3.1x more total assets than total liabilities for total equity of $119.7 million. Having significantly more current and total assets than liabilities demonstrates that Ultralife can handle its short and long=term debt.

The company's cash flow improved over the past 12 months. Ultralife went from having negative $1.7 million in operating cash flow in 2022 to having a positive $2.5 million for the trailing 12 months. Ultralife did issue $6.1 million in new debt in the trailing 12 month period, but repaid $3 million in debt. Ultralife also spent $2.1 million in CapEx during this period. Overall, Ultralife's improvement in profitability should lead to having a healthy positive cash flow going forward. This will help the company expand going forward.

Ultralife's Long-Term Outlook

Overall, I like how Ultralife is achieving strong revenue growth in the Battery & Energy Products segment. I also like how the company continues to make operational improvements to improve profitability. The need for Ultralife's portable battery/power products is poised to increase over the long-term with multiple industries demanding reliable solutions.

Ultralife's strong expected double-digit revenue and earnings growth has the likely potential to drive the stock for above-average gains for multiple years from the reasonable valuation level.

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