The potential superstock for the week is Ultralife Corporation (ULBI) . ULBI designs and manufactures power and communications systems incl...

Weekly Superstock Scan 19 Mar 2018 - 23 Mar 2018: Ultralife Corporation (ULBI)

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The potential superstock for the week is Ultralife Corporation (ULBI). ULBI designs and manufactures power and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, and custom engineered systems. ULBI sells their products and services to government defense and commercial sectors internationally.

ULBI operates in two operating segments:
  • Battery & Energy Products segment: includes Lithium 9-volt, cylindrical, thin cell and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as cables.

  • Communications Systems segment: includes RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, integrated communication systems for fixed or vehicle applications and communications and electronics systems design.

In 2017, the Battery & Energy Products segment contributed to 82% of ULBI's revenue, and 52% of ULBI's revenue was obtained from government and defense.





Technical



ULBI has been trading in a box from $6 to $8 since July 2017. Last week, price broke strongly above the box to $9.60 before closing at $9.35 for the week. The volume for the week was 460 thousand shares, almost 3 times its average weekly trading volume.

The $7.50 to $8 region has served as strong area of resistance since 2010. If ULBI can stay above the resistance, the next major resistance may be as far as $15.

There was no earnings release or press release last week, so the reason for the spike is unknown


Fundamentals



Including the most recent quarter, ULBI recorded 6 consecutive quarters of year-on-year EPS growth (including flat quarters). 

New Products for the IoT market

ULBI has developed ThinCell products and 3-volt cylindrical cells that are commonly used for wireless devices in IoT. ULBI estimates that there could be 50 to 100 million units of household security systems and other types of devices produced, and ULBI is targeting to capture 5% to 10% of the market. At this point, ULBI is already working with more than 20 companies for possible collaboration in the IoT space.

Other than IoT, ULBI is also looking at new products opportunities in the medical, asset tracking and robotics market.

Increasing Backlog

ULBI's order backlog at the end of FY 2017 was $39 million, 49.3% more than the end FY2016 backlog of $26 million. This is driven by higher demand for medical products and a large order for their Vehicle Amplifier-Adaptor through a large global defense supplier for the U.S. Army's Security Force Assistance Brigades.

Return of Government Orders

ULBI saw difficult government spending environment for the past few years. In Q4 2017, early signs of recovery continue to emerge and revenues increased 8% year-on-year with contributions coming in from the DLA and World Business Channel Partners.

Furthermore, the new defence budget gives the Pentagon an increase of US$80 billion this year and US$85 billion next year. This is good news for ULBI as that will mean more orders from the DoD and some of them involving longer term projects with the increase visibility of more funds coming in the future.

Matrices
o Small float of 9.75 million shares with a average daily trading volume of 34000 shares. The float is thus almost 290 times its average trading volume.
+ ULBI is trading at 25.3 times its trailing twelve months EPS.

Risk Factors/ Things I do not like:

  • High Valuation: Its current valuation is on the high side. Its growth rate may not be able to support a higher valuation, hence the upside of the stock may be limited. We may even see a drop in share price if the company is deemed as overvalued.
  • Sporadic Nature of Government Orders: Defence/government orders contribute a significant portion to ULBI's revenue. However, orders from U.S. DoD and other international defense organizations can be sporadic based on their needs. ULBI is trying to diversify into the commercial sector to smoothen out its revenue stream.



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