2023-03-23 16:16:13 ET
Summary
- If you go back to May 1996, the share price of KVHI was trading at about what it is today.
- The major challenge the company has faced for years is its inability to sustainably break out to the upside - with its share price and performance.
- In the last quarter, the company did improve on the bottom line, but it still posted a loss for full year 2022.
- Why I consider the company a good swing trade play, but not a buy-and-hold.
KVH Industries, Inc. (KVHI) competes in mobile connectivity segment of the market that focuses on keeping mariners connected.
When looking at any long-term chart of the thinly traded KVH Industries, Inc., it's readily apparent that the company hasn't been able to break out for over a quarter of a century, and based upon the small, targeted niche it competes in, is unlikely to do so in the future either.
With businesses like this, it's usually better to focus on what it's doing concerning the bottom line rather than the top line because of the limited upside a company has in a small niche like this.
In that regard KVHI has improved over the last year or so, after struggling before that with losses. It hit a 52-week low of $6.89 on May 10, 2022, and has since jumped to its 52-week high of $11.88 on November 29, 2022, before pulling back to approximately $10.00 per share as I write.
In this article we'll look at some of its recent numbers and why the company is best to consider as a swing trade rather than a long-term holding.
Some of the numbers
Revenue in the fourth quarter of 2022 was $36.00 million, compared to revenue of $35.3 million in the fourth quarter of 2021. Full year 2022 revenue finished at $138.9 million, compared to full year 2021 revenue of $134.00 million.
Adjusted EBITDA in the fourth quarter of 2022 was $4.3 million, compared to adjusted EBITDA of $0.7 million in the fourth quarter of 2021.
Net income in the reporting period was $591,000, or $0.03 per diluted share, compared a net loss of -$(4.08) million, or -$(0.15) per diluted share in the fourth quarter of 2021. Net income for full year 2022 was $24.1 million, or -$(0.21) per diluted share, compared to net income for full year 2021 of -$(9.8) million, or -$(0.63) per diluted share.
When considering KVHI had an operating loss of $23.00 million in 2020, and an operating loss of $20.00 million in 2021, it has proven it can execute on its plan to improve the bottom line. It has more work to do to make it impressive, but it's heading in the right direction.
Now, as always, the question for the company is if it can maintain consistency and sustainability in improving the bottom line, because I see that as the key catalyst going forward because of the limited upside the company with current visibility. At the end of calendar 2022 the company had cash, cash equivalents, and marketable securities of $76.74 million, compared to cash, cash equivalents, and marketable securities of $24.5 million at the end of calendar 2021.
Company's strategy
For the most part, KVHI is focusing on minimizing attrition by offering value-added services and an interesting hybrid connectivity solution. The latter has the most potential in my view, as its TracNet terminals will empower users to integrate companion systems.
Management described it like this:
The combination of our terminals with integrated VSAT, 5G, WiFi together with new LEO and MEO services will enable us to offer robust, affordable, multichannel multi-orbit hybrid solutions.
There is some potential for some incremental growth with the above initiative, but in general, I see it as moves for the company to retain market share rather than be a significant driver of growth; not just for TracNet, but its other services as well.
There is little doubt in my mind that management's strategy is to continue to improve its bottom line while possibly having the additional benefit of possible slow growth on the top line over time.
Again, based upon the target market it's serving, the upside is limited, and isn't likely to change much anytime soon.
To reinforce my thesis, when looking at the growth grade of the company as it relates to revenue, its year-over-year score is "D" and its ((FWD)) score is "D-". Year-over-year revenue growth for the company was 3.71 percent, while the sector median was 14.66 percent, a differential of -74.69 percent.
On a FWD basis, revenue growth is expected to be approximately -2.36 percent, compared to the sector median of 10.85 percent.
The reason KVHI gets a B+ grade on growth is because of metrics like EBITDA growth and growth of operating cash flow.
Profitability
While the profitability grade of KVHI is "B+", you do have to pick through the various metrics to find its strengths and weaknesses. For example, EBITDA margin is over 26 percent under the sector median, while the important net income margin metric is far above the sector median.
Other metrics it underperforms the sector in are return on equity, return on capital, and cash from operations.
Where it outperforms the sector is in levered free cash flow margin, return on total assets, and net income per employee.
If the company is able to continue to deliver on the bottom line, these numbers could easily improve more, and could be a possible catalyst for the company, albeit one that is limited for the reasons mentioned above.
Conclusion
Other than during the Great Recession, the share price of KVIS has moved in a range of approximately $7.00 per share as a floor and about $15.00 per share as a ceiling, since July 2004. I see nothing in the comments of management that suggest that trading range is going to change.
The reason why, as mentioned a few times in the article, is the limitation on revenue growth based upon the niche market KVHI competes in. That's why cutting costs and improving the bottom line, while improving its products and services in order to maintain its customer base, and in the best-case scenario, slightly grow it, is how the company is going to continue to operate.
This is why I see the company as a good swing trade, but not one that investors should buy-and-hold for a prolonged period of time. The best entry point based upon the trading history of the company is when it approaches the $7.00 per share mark. At that level there is very little downside risk, and a lot of temporary upside potential.
KVHI isn't a bad company by any means, especially after it has proven it can take a lot of the operational costs out of the company while maintaining its revenue performance.
Based upon its past performance, I see it as trading too high to get a good return on investment at this time. The stock needs to pull back again before taking a position that offers an attractive risk/reward scenario.
I see nothing at this time that would be a negative catalyst that would drive the share price of the company below its long-term floor of approximately $7.00 per share, outside of it failing to continue to execute on its strategy of improving the bottom line.
When it approaches the $8.00 mark or lower, it would be an interesting stock to consider as a swing play.
For further details see:
KVH Industries: Why The Company Hasn't Broken Out For Over 25 Years