Sunday, 2 July 2017

DPW: An Undervalued NYSE-Listed Microcap Poised For A Run Based On Fundamentals

On Tuesday morning we introduced our readers to Applied DNA Sciences, Inc. (APDN) when it was trading at $1.40. We suggested that it will hit $2.00 shortly and so far it has come close, hitting as high as $1.94 and closing at $1.76 on Friday. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 241 followers despite the relatively few articles that we publish. We think this good growth in followers is indicative of people liking our picks and research.

NASDAQ-listed penny stocks have been on a tear over the last couple of weeks, particularly those that have broken out from a long-term downtrend like ReWalk Robotics Ltd. (RWLK), AVEO Pharmaceuticals, Inc. (AVEO), Marathon Patent Group, Inc. (MARA), Delcath Systems, Inc. (DCTH), Spherix Incorporated (SPEX) and CHF Solutions, Inc. (CHFS). Some of them moved on news, others have simply moved from their oversold condition. But there was one active stock on Friday which really stands out as being highly undervalued based on fundamentals trading on the NYSE, Digital Power Corporation (DPW).

DPW closed up 50% to $0.72 on over 10 million volume on Friday after releasing the following quarter-end investor update:

FREMONT, Calif., June 30, 2017 (GLOBE NEWSWIRE) -- Digital Power Corporation (NYSE MKT:DPW) ("Digital Power" or the "Company"), a growth company seeking to increase revenues through acquisitions and organic growth, today announced that is customer order backlog has increased to over $65M, an increase of $8M from the prior update issued by the Company on May 17, 2017. The increase was attributed to organic growth from new and current customers of DPW and the consolidation of financial reporting which now includes Microphase Corporation.

Amos Kohn, the Company’s President and Chief Executive Officer, stated, “We continue to see strength in our custom power supply business as our order book grows. With the purchase of Microphase Corporation, we will also see strong cost savings which will increase our gross and net margins. We are very excited about our continuing prospects to reduce costs while expanding production across the enterprise.”

The Company reported that it has received from its customer, MTIX, Ltd., order instructions with production schedules and specifications which have launched the formal production process for the machines that utilize MTIX’s proprietary technology. On March 15, 2017, the Company announced it had been awarded a 3-year, $50 million purchase order by MTIX Ltd., headquartered in Huddersfield, West Yorkshire, U.K., to manufacture, install and service textile treatment systems that utilize MTIX’s proprietary Multiplexed Laser Surface Enhancement (MLSE™) system. The Company confirmed that though production planning and scheduling had been underway, these tasks are now being driven to completion. The Company is fully engaged to incorporate the customer’s final specifications and schedules into the production cycle and implement, execute and manage all aspects of this new revenue stream. The Company disclosed that invoicing for the initial deposits necessary to launch production total $1.5MM and anticipate additional invoicing to support the escalation of production over the coming weeks. The Company stated that revenue from the production of the MLSE machines will be recognized in fiscal 2017 and should measurably impact both the gross and net profitability for the Company.

Regarding the progress made in production with MTIX, Ltd., Mr. Kohn said, “The execution of the general contract with MTIX, Ltd. has resulted in a positive material change to the future prospects of the Company. The added value to shareholders is yet to be understood. Over the coming years, this contract and relationship we believe will provide massive value to our shareholders.”

DPW has 11,789,546 shares outstanding after a small offering of 289,092 shares were made to certain creditors for the cancellation of $159,000 worth of debt earlier in the week. This could explain why the stock pulled back from over $1.00 late in the day as creditors would take their easy profits with no regard to the company's bright future. Those who were able to see past this minimal dilution have been able to take advantage of a very undervalued company based on this update. Even with the recent offering, DPW has only an $8.5 million market cap based on Friday's close of $0.72. This is extremely low for a company with over $65 million in backlog. Backlog is also growing quite quickly - an increase of 14% in the six weeks between mid-May and the end of Q2.

Look at DPW's Q1 income statement:

Revenue was $1,628,000 for Q1 and gross margin was $708,000 or 43.5% and a net loss of $1 million. We know that the three year $50 million contract is being deployed right now and will materially impact numbers in 2017.

Let's say the split over the next three years is $10 million in revenue for 2017 and $20 million each in 2018 and 2019. If gross margin is 40%, that means $4 million will be added to the bottom line, taking the company from a million dollar a quarter burn rate to $300,000-$400,000 in net income for the remaining three quarters assuming costs remain static. 2017 would end approximately breakeven under this scenario. This does not take into consideration the remaining $15 million in backlog which could also have a material impact in 2017 though some of that may be baked into the existing $1.6 million per quarter revenue run rate.

2018 would be a very lucrative year. If $20 million in revenue leads to $8 million in gross profits, a $1 million burn rate per quarter would turn into $1 million in net income per quarter. That is an 8.5 cent EPS per quarter or $0.34 EPS for 2018. A P/E ratio of just 10 would imply a $3.40 stock price. We think a target of $2.00 fairly accounts for any risk this deal may have until it materializes. Now that DPW has garnered the attention of many traders, expect it to start trading at a much more fair price to reflect the value of its backlog.

Disclosure: We are long DPW

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