KVH Industries Is a Contrarian Technology Play With Aggressive Upside
While the Nasdaq and Russell 2000 are up about 23% this year, there are still numerous micro- and small-cap stocks that have missed the party.
KVH Industries, Inc. (NASDAQ:KVHI), a developer of specialized satellite-based communications technologies with a market cap of $186.8 million, is such a company that has come late to the dance. But that doesn’t mean it won’t find a partner.
Trading down 3.1% over the past year and up a mere 2.1% this year at the time of this writing, KVH stock is on the outside looking in.
But while the company has much work ahead of it, sometimes it’s worth a look to accumulate these dogs at a time when the masses are running away.
My bullish thesis for KVH Industries, Inc. is based on its battered stock price. The company has intriguing technologies and is expected to improve its revenue and earnings picture.
On the chart, KVHI stock has bounced from the December meltdown when its share price fell to $9.16.
Chart courtesy of StockCharts.com
If KVH Industries can deliver on its financials and convince the stock market that it’s on the path to improving its fundamentals, KVHI stock could next target $11.50–$12.00, followed by a move to $13.00–$14.00, last encountered in 2015. This implies a potential gain of around 50%.
My Fundamental Bull Case for KVHI Stock
The revenue picture has been erratic over the past five years for KVH Industries, Inc., with a failure to achieve any steady growth. We saw a bounce in 2018 and the consensus is calling for this to continue.
|Fiscal Year||Revenue (Millions)||Growth|
(Source: “KVH Industries,” MarketWatch, last accessed March 14, 2019.)
For 2019, KVH is estimated to increase its revenue by 7.3% to $183.3 million, which would be the company’s highest growth rate in five years. Revenue is expected to jump 10.3% to $202.2 million in 2020. (Source: “KVH Industries, Inc. (KVHI),“ Yahoo! Finance, last accessed March 14, 2019.)
KVH has been generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA), including a jump of 150.5% to $5.7 million in 2018.
|Fiscal Year||EBITDA (Millions)||Growth|
(Source: MarketWatch, op cit.)
On a generally accepted accounting principles (GAAP) basis, KVH recorded profits in 2015 prior to three straight years of losses.
|Fiscal Year||GAAP Diluted Earnings Per Share|
But on an adjusted basis, KVH Industries, Inc. earned $0.09 per diluted share in 2017 and $0.03 per diluted share in 2018, albeit the results were short of the estimates.
KVH is set to earn $0.06 per diluted share in 2019 and $0.30 per diluted share in 2020. (Source: Yahoo! Finance, op cit.)
On a free cash flow (FCF) basis, KVH recorded positive numbers from 2014 to 2016 prior to recording negative results in the past two years. FCF will likely return to positive as profits rise.
|Fiscal Year||Free Cash Flow (Millions)|
(Source: MarketWatch, op cit.)
KVHI stock is not cheap, trading at 35 times its consensus 2020 earnings per share and having a price/earnings-to-growth ratio of 5.96, but the company is all about improving its fundamentals at this stage.
For a small company, KVH Industries, Inc. has relatively decent institutional ownership, with 100 institutional investors holding 65.4% of the outstanding shares. (Source: Yahoo! Finance, op cit.)
If KVH can deliver on its financials, an investment could return strong gains for speculators.