Re: Another Falling KnifeAnother Falling Knife? Great!! This means more opportunities to buy an obviously undervalued stock. "Falling knives" are a prevalent outcome of investment markets in thinly traded stocks where the stock price easily can continue a downward trend on a constant dribble of 100 share sales at the downtick. This is a sign of weak hands overreacting to the exaggerated corrections that thinly traded stocks frequently undergo especially when, as has been the case with FTG over the past several months, there has been a pattern of accumulation by strong hands. This is a classic pattern seen time and again in the markets. While insiders have not been significantly increasing their holdings and institutional investors have continued to increase positions in a steady, but not accelerating, upward trend this possibly indicates there are multiple knowledgeable interests accumulating the stock. Perhaps, as may be the case, the accumulation is for the purpose of eventually making a takeover offer for FTG. This would not be a surprising outcome given the publicly stated intentions of larger players in the Aerospace & Defense sector to vertically integrate parts of their supply chains under organizational ownership with avionics being a prominently mentioned target. This pattern has been seen previously in the A&D sector such as the United Technologies' takeover of Rockwell Collins and TransDigm's takeover of Esterline (who themselves had taken over another Canadian A&D supplier Canadian Marconi). As well, Boeing and TTMI are expanding into avionics supply and services both for OEMs and to gain a controlling position in the aftermarket and the very lucrative long term maintenance and upgrade of aircraft fleet avionics. FTG's primary products, PCBs, panels and bezels, are major components of each and every new aircraft and aircraft overhaul as well as every avionics upgrade in the aftermarket.
Last year we saw a doubling in the FTG share price. This was somewhat of a surprise although it was not completely unexpected just that it happened so quickly. The stock at that time had also been undervalued. While it was great to be able to sell at over $4.00 (several opportunities were available between January and July) even better is that there now is the opportunity to do it all over again. Nothing to disadvantage FTG has occurred in the interim. Actually, just the opposite. The company's cash position is even stronger, debt is minimal, sales are solidly over $100MM and increasing, the Teledyne and PhotoEtch acquisition have been incorporated into company operations with full retention of the new customer bases, more new long term contracts are now in place, margins are consistently over 20%, significant barriers to entry in the A&D avionics supplier space continue to maintain a strong moat around FTG, and there are thousands of aircraft on back order at manufacturers. FTG is going to keep on, keeping on doing a good job that will be rewarded by a more reasonable valuation.
All in all, with these many fundamentals in place an investor would be happy to be accumulating at these levels. FTG is certainly undervalued. One could reasonably expect the share price to again double within the next couple of years or so. But, what if a recession (no matter how unlikely it may seem at the present time) really might occur in the immediate future? Well, what of it? Recessions eventually end and shares prices do recover. That's proven history that cannot be denied. Does anyone really think that the thousands of commercial aircraft currently on back order will not be delivered? Does anyone think that recent changes to our tax laws in the U.S. and, as of yesterday in Canada, advantaging corporate aircraft acquisitions will not drive increased business aircraft sales? Does anyone think that the FAA-mandated changes driving required upgrades to current avionics equipment will be rescinded? Does anyone think that the long-delayed avionics modernization programs for government and military aircraft around the world can continue to be delayed forever? In other words, the market demand conditions for FTG (the only publicly traded entity specializing in the A&D avionics supplier space) to continue profitably in operation will remain in place whatever economic conditions may prevail in the meantime.
FTG's management has indicated it is continuing to look at acquisitions. The next acquisition could be financed in part with a new share issue. It would not be surprising to see FTG build up a war chest perhaps coupling a new share issue with a rights offering which indeed would make it quite attractive for current FTG shareholders.
So, is this really another "falling knife" or is it really a great buying opportunity? Actually, it's both is it not? This "falling knife" is providing investors with an opportunity to acquire shares in a great little company that evidently is being currently undervalued by the market.