Cemtrex, Inc. is a value stock pick with plenty of upside potential in this strong stock market
Cemtrex Inc. (NASDAQ:CETX) is a stock pick with strong focus on value investing, which we believe has a lot of upside potential, being undervalued at current price levels of about $3.30. The stock belongs to the Sector of Industrial Goods and to the Industry of Industrial Equipment & Components, and the first step to our fundamental analysis will be the macroeconomic outlook of the Industrial Goods Sector. The Sector is very important for any stock as a starting point of fundamental analysis as it highlights current and future opportunities and trends, which are crucial for any business and its future growth and attractiveness.
Company description:
Cemtrex Inc is a diversified technology company. The Company provides electronic manufacturing services of electronic system assemblies, instruments and emission monitors for industrial processes, industrial air filtration& environmental control systems.
Macroeconomic outlook:
A report from Fidelity Investments mentions that the industrials sector will probably have a strong year in 2017, based on two major factors and trends:
1. Increased investment in infrastructure.
2. Rising budget for U.S. defense spending.
Government spending on infrastructure projects and increased investments in defense strategic purposes can prove to be supportive and beneficial for a strong performance of the sector, something that has proved to be the case so far in 2017, as the ETF Industrial Select Sector SPDR Fund (NYSE:XLI), which tracks closely the industrial sector of the S&P 500 index has as of 08/31/2017 closing price a 1-year return of 19.26% and a year-to-date return of 11.11%. We see on the weekly chart that a current strong uptrend is evident.
Also another report from Charles Schwab (NYSE:SCHW) has a market perform rating on the industrials sector, with positive factors the “potential productivity gains, room for growth and accommodative monetary policy”. The 5-year trend for the Industrial Production Index is also an uptrend, with increased volatility, but a resumed uptrend since March of 2016, an economic factor we consider positive for the business outlook of the company. Overall the macroeconomic outlook for the industrial sector looks positive, with a strong performance in 2017.
Fundamental analysis:
We will start our fundamental analysis of Cemtrex with the Nasdaq Dozen process, a method of analyzing a stock in 12 steps. Each of the 12 factors gets a pass or fail grade and the higher overall score, there is more confidence in the stock as it presents very important fundamental aspects. Here are the scores for each of the Nasdaq Dozen factors process for shares of Cemtrex, Inc.:
1. Revenue
A passing score as revenue in FY 2016 is $93.70 million, higher than the $56.89 million in FY 2015, and June 2017 quarterly revenue of $27,806 million was higher than June 2016 quarterly revenue of $24,714 million.
2. Earnings per share
The FY 2017 is not yet complete, so on a quarterly basis we compare the EPS in the most recent quarter with the same quarter in the previous year. For June 2017 the EPS were $0.08, lower than the EPS of $0.17 in June 2016, so there is a failing score.
3. Return on Equity
The stock gets a passing score if it has a rising ROE for two consecutive years. It gets a failing score because the After Tax ROE for FY 2014 was 73%, for FY 2015 was 40% and for FY 2016 was 32%.
4. Analyst Recommendations
The stock gets a passing score as the analyst recommendations consensus is a buy, although there is only one analyst opinion.
5. Positive Earnings Surprises
The stock gets a failing score, as in the past four consecutive quarters not all EPS surprises have been positive. There have been two positive and two negative EPS surprises.
6. Earnings Forecast
The stock gets a passing score as the consensus EPS forecast numbers increase year over year. For FY 2017 the consensus EPS forecast is $0.29, for FY 2018 $0.72 and for FY 2019 $1.19 respectively.
7. Earnings Growth
The stock gets a passing score if the long-term 5-year earnings growth is higher than 8%.But for the CETX stock the average long-term 5-year earnings growth is 0.00% so the stock gets a failing score.
8. PEG Ratio
The stock gets a passing score if the PEG ratio is less than 1.0. For the CETX stock there is insufficient information on the Nasdaq website, so we will not take it into consideration into our final score and we will calculate the score based on the other 11 out of 12 factors.
9. Industry Price Earnings
The stock gets a failing score as the company's earnings are lower than the industry's earnings.
10. Days to Cover
This figure measures the number of days, based on the average trading volume of the stock, that it would take all short sellers to cover their short positions. A stock gets a passing score if the number of days is less than 2 days. For the latest settlement date of 8/31/2017 the actual number of days to cover is 5.404281, so the stock gets a failing score.
11. Insider Trading
The stock gets a passing score as the net activity for the past 3 months has been positive. The CETX stock shows a positive net activity of 3,800 shares so it gets a passing score.
12. Weighted Alpha
Weighted Alpha measures 1-year growth with an emphasis on the most recent price activity, with a positive number indicating the stock is trending higher. The stock gets a passing score if the Weighted Alpha score is positive. On the Nasdaq Website the score for the CETX score is -17.90, negative, so the stock gets a failing score. The total score for the 12 factors if we exclude the factor of PEG Ratio for which there is not enough information is a score of 4 passing scores and 7 failing scores, and a ratio of 4:7 for passing and failing scores. This is only one part of the fundamental analysis, and more emphasis on the trends of financial performance will follow to help us support a well detailed argument for the recommendation of the stock.
We will analyze the financial performance and trends for the CETX stock for a 5-year period analysis for the years 2012-2016, as the fiscal year 2017 has not ended yet. Starting with the Income Statement there is an uptrend for the Sales/Revenue, Gross Income, Net Income, EPS (basic and diluted) and EBITDA for these 5-years, a very positive fundamental feature. The revenues grew 64.72% in FY 2016 as compared to FY 2015 to 93.70M, while Net income grew 75.96% to 4.99M, and EPS (diluted) grew to $0.58 compared to $0.40, an increase of 45%. Also the increase of about 125% to the EBITDA in FY 2016 of $7.36 million, compared to the EBITDA of $3.27 million in FY 2015 is very significant and positive for the valuation of the stock.
The company has a strong Balance Sheet and strong financial strength, with increased cash available in our 5-year trend analysis, increased Total Equity, and a low Debt/Equity ratio of 0.35, while liquidity is strong with a current ratio of 2.55 and a quick ratio of 1.66.
The Cash Flow Statement present a volatile trend for Net Operating Cash Flow and Free Cash Flow for the 5-year period of our analysis. For FY 2016 and FY 2015, the company has positive and increasing cash flows, with a large increase of 247.52% for the Net Operating Cash Flow in FY 2016 to $14.04 million compared to the figure of $4.04 million in FY 2015, and an increase of 430.55% for the Free Cash Flow in FY 2016 with a reading of $13.37 million compared to the figure of $2.52 million for the FY 2015. This very large increase in the Free Cash Flow in FY 2016 supports at a very large degree our valuation of the stock and the statement that it is undervalued at current stock price of about $3.30.
Financial Ratios Analysis:
Profitability ratios and margins ratios present a mixed trend. The company has managed to increase its Gross Margin from 11.31% in FY 2012 to 31.18% in FY 2016, but for Operating and Net Margin there is an inconsistent trend. However Operating Margin and Net Margin have increased in FY 2016 compared to FY 2015, with readings of 5.40% for Operating Margin and 5.33% for Net Margin in FY 2016, while in FY 2015 the figures were 4.40% and 4.99% accordingly. There is also an inconsistent trend for other measures of profitability, such as the Return on Assets and Return on Equity financial ratios. Both of them have declined in the FY 2016 compared to the FY 2015, but on a trailing twelve months basis the company has higher ROE and ROA compared to the average ratios of its industry and sector. The company has a trailing twelve months ROE of 18.83%, when the relevant ROE average readings for the industry and sector are 13.82% and 13.87%, and a trailing twelve months ROA of 8.0%, when the relevant ROA ratios for the industry and sector are 3.73% and 7.71% accordingly.
Activity ratios present a weak efficiency for the company as all of the following activity ratios Receivables Turnover, inventory Turnover, Fixed Assets turnover and Asset Turnover, present a downtrend, which is consistent for all of the previous 5-years for the Receivables and Asset Turnover, while for the rest of the efficiency ratios there is a decline for the latest three consecutive years.
Liquidity and solvency ratios present also increased volatility for the 5-year period of financial analysis, but their trend shows a company with increased financial health, good liquidity with a Current Ratio and Quick Ratio readings of 2.55 and 1.55 respectively for the latest quarter, while Debt/Equity Ratio has declined to 0.26 in the latest quarter, down from a reading of 0.96 for FY 2016. The company also is reducing its Financial Leverage Ratio with a reading of 1.77 for the latest quarter compared to a reading of 3.57 for FY 2016, and it has a trailing twelve months reading of 7.04 for its Interest Coverage Ratio, which is considered strong enough, posing not any short-term financial worries.
Growth:
Growth is very important for any stock, especially for valuation purposes, and this sector is very strong for the company which grows at both attractive and not excessive levels. Again we focus on long-term growth rates based on a 5-year period analysis for years 2012-2016 to have a more indicative trend, as short-term trends often are prone to specific factors, which can distort the actual trends. The 5-year average growth rates for the company in FY 2016 for the Revenue, Operating Income, Net Income and EPS are 46.83%, 35.61%, 37.64% and 37.04% respectively. The company therefore shows consistent growth both in Revenue and Profitability, which we consider a very positive aspect of our fundamental analysis.
Analyst Recommendation and Historical Surprises:
Although there are not many analyst opinions, only one, the consensus recommendation is outperform, and this has not changed for the past three consecutive months. The company for the past five quarters has three positive and two negative surprises for sales, with an average surprise of 6.776%, and also three positive surprises and two negative surprises for EPS, with an average surprise of -0.128%.
Valuation Analysis:
We will compare the shares of Cemtrex, Inc. (NASDAQ:CETX) to the average financial ratios of its industry and S&P 500 Index, and also to some of its major competitors as a basis for our relative valuation analysis.
Relative valuation table 1
Price Ratio
CETX
Industry Average
S&P 500
Price/Earnings
6.8
69.6
21.5
Price/Book
0.9
2.7
3.0
Price/Sales
0.3
1.4
2.1
Price/Cash Flow
17.8
24.1
13.5
From the relative valuation table 1 the CETX stock seems relatively significantly undervalued compared to all the average price ratios of its industry, and the relative price ratios of the S&P 500 index, with the only exception of Price/Cash Flow Ratio, as CETX stock has a higher current price ratio compared to the current price ratio of S&P 500 index. If we compare the company to some of its major competitors in the stock market, we get the following results summarized in relative valuation table 2.
Relative valuation table 2
Price Ratio
CETX
CECE
FTEK
ENTG
Price/Earnings
6.80
N/A
N/A
33.12
Price/Book
1.95
1.45
0.53
4.39
Price/Sales
0.35
0.67
0.43
3.37
We refer to related companies CECO Environmental Corp. (NASDAQ:CECE), Fuel Tech Inc. (NASDAQ:FTEK) and Entegris Inc. (NASDAQ:ENTG). For the FY 2016, CECO Environmental and Fuel Tech had losses and therefore their Price/Earnings Ratio is not meaningful. The second relative valuation table above, shows that for two out of three price ratios, the CETX stock has the lowest ratios for Price/Earnings and Price/Sales compared to the three other companies. And for the Price/Book ratio the CETX stock has a lower ratio than the other company, which has positive profitability. So compared to three other major competitors, the CETX stock seems also relatively undervalued. There is a difference in the current price ratios of CETX stock in the relative valuation table 2 compared to the price ratios of relative valuation table 1, due to the difference source used.
The one analyst has a 1-year target of $4.50 per share for the CETX stock, a forecast we believe is not unreasonable based on our relative valuation analysis, offering a potential upside gain of about 37% from the closing price of $3.24 on September 19th 2017. The stock also has a dividend yield of 0.60%, which although is not large enough, it can contribute positively to the holding period return.
Technical Analysis:
Technical analysis of a stock can prove to be very important in terms of timing the entry for a trade, as an undervalued stock can continue to move lower if its current trend is a downtrend, something that is also true for overvalued stocks in a strong uptrend. The technical analysis for the CETX stock shows that the long-term trend is a downtrend, as the stock is currently trading below its 200-day moving average currently at 4.05 which is declining. However we can highlight the following positive and bullish signs about the stock, a bullish MACD indicator which is rising, the stock has closed above its falling 50-day moving average currently at 3.18, which can show a trend change, and the ADX(14) indicator which measures the strength of the trend and its direction shows a reading of 26.67, and in essence this means that the trend is gaining strength and momentum, while the +DI reading is at 28.40 , above the –DI reading of 12.50, indicating that the current dominant trend is an uptrend.
The daily Bollinger® bands with 2 standard deviations containing 95% of the stock price are at 2.71 and 3.40 for the lower and upper band respectively, and the stock price has made a strong bounce from the level of $2.71, a recent bottom. The stock has strong support at the levels of $3.00 and $3.15, and strong resistance at the levels of $3.30, $3.45 and $3.70. The stock recently made a high around the level of $3.48, where there is strong resistance and now is making a correction lower, so a better and less risky trade would be to wait possibly for a correction at lower levels, reaching oversold levels in readings of popular indicators such as the Full Stochastics. At present the stock is not in any extreme overbought or oversold conditions.
Analyzing the weekly chart for a long-term technical analysis, the stock shows a bullish picture, with a rising MACD indicator, a trend which is not yet strong, but with a +DI reading of 23.12, higher than the –DI reading of 18.78, indicating again that the current dominant trend is an uptrend, and adding a Fibonacci retracement from the high price of around $8.41 to the low price of around $2.66, we observe that the 50% retracement level lies around $5.50. We believe that if the stock breaks above the daily 200-day moving average currently at 4.05, can move to our profit target of $5.00-$5.50, which is more conservative than the 61.8% retracement level price of around $6.20. On the weekly chart we consider crucial the resistance levels of $3.75-$3.95, as a closing price above them can confirm the shift in the trend from a downtrend to an uptrend.
Investment Thesis Conclusion:
Shares of Cemtrex have the following fundamental features that we strongly believe are supportive for our buy recommendation at current price levels around $3.30 and a target of $5.00-$5.50 in a time period of 6 months to 1 year. The company and its stock show higher profitability compared to the average profitability ratios of the Industrial Goods Sector and the Industry of Industrial Equipment & Components, the company has a strong balance sheet and strong financial health, there are positive and increasing cash flows, both operating and free cash flows, there is positive growth in terms of Sales/Revenue and EPS, and the stock seems to be significant relatively undervalued compared to the price ratios of its industry, S&P 500 index and some of its major competitors.
There are points of concern, mainly the weakness in the operating efficiency in our 5-year period of fundamental analysis, but the company operates in a sector with promising and optimistic future outlook. We reckon that infrastructure government spending and higher spending in the defense sector, along with future promised tax cuts in corporate profits can be positive factors for the company and its stock. A stock with great fundamentals in a sector with poor prospects can be a laggard in price action, and for CETX stock this is not the case by all means. On the contrary the stock according to our fundamental analysis is both a value pick and a momentum pick, and our conservative price target of $5.00-$5.50, is supported also by the technical analysis. The current trend for the stock seems to change from a downtrend to an uptrend, and there is potential for an upside movement and gains of about 35% from current stock price level. The stock in addition a low dividend yield of about 0.60%, which is not a crucial factor to support our buy recommendation, but it can add an increased holding period return according to our timeframe for the trade of 6 months to 1 year.
Legal Disclaimer:
The author has not currently any shares of Cemtrex, Inc. (NASDAQ:CMTX) and stock recommendation, financial analysis and comments are the sole and independent opinion of writer. Sources used for the financial analysis are marketwatch.com, morningstar.com, reuters.com , Yahoo (NASDAQ:AABA) finance, Google (NASDAQ:GOOGL) finance and stockcharts.com