TPS Trade Alert – March 22, 2016
Recommendation:
Buy LRAD Corp. (NASD: LRAD) up to $1.90 per share.
The Opportunity:
It would be like going to a Rolling Stones concert, standing half a mile from the stage, and hearing every one of Mick Jagger’s vocal nuances perfectly.
That’s what a so-called Long Range Acoustic Device® does.
But these devices aren’t used in the entertainment business. You find them in prisons, on military installations, and wherever a bullhorn doesn’t cut it.
These devices aren’t just loud. They scramble audio in a way that sends it slicing through background noise, with fairly high quality, for more than 3 thousand feet.
Police departments use LRAD for tasks ranging from crowd control to weather warnings.
Many of these Long Range Acoustic Devices come from a Southern California company called LRAD Corp.
It designs, manufactures, and markets Long Range Acoustic Devices and ONE VOICE™ mass notification systems to blast out messages loud and clear.
LRAD systems are used in more than 70 countries. Applications range from mass notification and PA systems to mobile defense deployments, maritime security, infrastructure, perimeter, border, and port security.
LRAD’s customers range from local police departments to the U.S. Coast Guard.
Financials:
For fiscal year 2015, LRAD revenues were $16.8 million, down from $24.6 million reported in FY 2014.
The problem… delays in getting contracts signed and the strength of the U.S. Dollar. LRAD systems are used in more than 70 countries.
There’s a different story when you look at net income, which soared year over year. With the help of an $8.3 million tax break, net income for FY 2015 was $9.7 million compared with $3.3 million for FY 2014.
On a sour note, income from actual operations skidded by $2.0 million to $1.3 million.
But put all this in perspective and you have a company that’s been making money for six years in a row… not bad for a penny stock.
To set the table for more revenue, the company has expanded its sales and marketing team. It has also brought consultants on board to help steer it in the right direction to develop more global business.
Trade Rationale:
We don’t see defense spending being cut, and we don’t see budgets for local law enforcement tightening. Both these trends play out well for LRAD.
The stock pays a modest dividend, one cent a share for shareholders of record at the close of business on January 15, 2016. It would obviously be good to see this continue and grow.
The firm has also been buying back stock. While a lot of organizations announce buyback programs, putting cash on the barrelhead and actually making a purchase is a different story.
LRAD bought back 734,070 shares in FY 2015. It’s now repurchased 1.1 million shares since December 2013.
The stock has mostly been trading in the $1.50 – $2.00 channel over the past year.
If you’re more of a technical trader, you’ll notice that LRAD runs into support at $1.50 and, if it can break through resistance at $2.00, it could enjoy a smooth run up to $2.50.
Here’s how LRAD has performed over the past five years…
Investment Risks:
The company is at a crossroads. LRAD needs to revive sales.
If budgets for defense and law enforcement agencies shrink, this could slow down sales. If the long-range technology is seen as a luxury, and not a necessity, fewer orders translate into less revenue.
Another consideration… companies in the tech business are always at risk from an upstart competitor. A new company can come along that provides a better version of the product at a lower price.
Recent results have been disappointing.
For fiscal 2016 Q1, revenues totaled $2.8 million, compared to $4.4 million reported in the fiscal first quarter of 2015.
The company reported a net loss of $380,000. This loss factors in a $310,000 tax benefit.
There is something else to consider. These so called “sound cannons” aren’t always embraced by the public. The New York City Police Department is being sued by a group of people who claim they suffered ear damage when LRADs were used to break up crowds at a demonstration.
Potential Return:
With resurgence in sales, we see LRAD moving into the $2.50 – $3.00 trading range in fairly short order. Continuing growth, and the ability to turn a profit without the help of tax accounting, will send the stock higher.
More disappointing quarterly results and LRAD is just another “story stock”. The fact that the company has been profitable for the past six years isn’t a guarantee of great times ahead, but it does validate the business concept.
Key Facts:
Company: LRAD Corporation
Ticker: LRAD
Recent Price: $1.74
Buy up to Price: $1.90
Market Cap: $55.1 million
Avg. Daily Volume (3 month): 24,208 shares
Category: TPS Trade Alert
