Avionics Refurbishing Stocks Develop Fundamental Value: Michael C. Heaberg, Managing Director of Axiom Asset Management Shares His Top Picks

Wall Street Transcript

67 WALL STREET, New York - September 13, 2012 - The Wall Street Transcript has just published its Investing in Technology and Other Strategies Report. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Technology - Bottom-Up Investing - Price Discrepancies - Alternative Investing - Small-Cap Investing

Companies include: PowerSecure International, Inc (POWR), Furmanite Corporation (FRM), BP plc (BP), Innovative Solutions & Support (ISSC), Boeing Co. (BA) and many others.

In the following excerpt from the Investing in Technology and Other Strategies Report, a veteran portfolio manager discusses his top stock picks for investors:

TWST: What are the criteria Axiom uses when evaluating and selecting individual investments?

Mr. Heaberg: Our analysis is fundamental. We look at financial statement analysis, and we pay particular attention to the balance sheet, because given that we invest largely in small companies, we want to have a strong conviction that the company has a balance sheet that's going to allow them to survive difficult times. We tend to be averse to debt. We obviously also look at the income statement, as well as get into discussions with company management and external industry research to try to get a feel for what type of growth characteristics the company has from an income statement standpoint.

TWST: Would you give us a few examples of favorite investment picks right now?

Mr. Heaberg: Sure. I would say we're opportunistic, and so we don't have a list of things we're buying that's 50 deep, but we have a few things that we think are attractive at current prices.

One is a company called PowerSecure International (POWR). PowerSecure is in the electrical generation business, primarily in three business areas. They have a distributed generation business, which is a business where they provide backup and standby generating capacity for companies, for hospitals, for manufacturing plants and for retail locations, which are located on-site at the facilities. They are used to provide for backup generation in the event of a power outage, and also generation to supplement pulling power from the grid. That sector of the business has grown nicely over the last several years.

They also provide utility infrastructure services, where they support the needs of large power companies in maintenance and construction of their power grid. They will go out and help them repair lines in the event of a storm, upgrade transmission equipment, all those type of services.

And their third major business is what they call energy efficiency, which is an LED lighting business. They have some targeted products in that area. Historically, they've had strong relationships with retailers through their distributed generation business, for example, grocery stores, and so they have some specific LED lighting products that are targeted to refrigerated cases in grocery stores and LED lighting, which significantly reduces power costs. Their LEDs consume less power, they generate less heat - which is important in a refrigerated case - and the replacement cycle on them is much longer than it is on the fluorescent lighting, which historically had been used.

Overall, the company has enjoyed very strong revenue growth over the last several years. In 2010, their revenues were a little less than $100 million. Last year, they were about $130 million; and this year, they will probably be somewhere in $150 million to $160 million. So the company is growing at a very, very nice clip. They also have a strong balance sheet, with a nominal amount of long-term debt, and more than $20 million of cash on the balance sheet, which is a little over $1 a share. We think it's an interesting opportunity. We think the risk/reward is very favorable for a company that's growing as fast as they are.

A second company that we find interesting is Furmanite Corporation (FRM). Furmanite is a provider of maintenance and repair services, primarily for the energy industry. They maintain and repair pipelines and valves. They also do turnaround maintenance, which is maintenance on refineries and chemical appliance. We've owned Furmanite over the last 10 years or so.

The company has been challenged by a slowdown in their European operations, which they have restructured to reduce costs, and now even with revenues at about half of where they were several years ago, that business should break even or be a small net positive. But their U.S. business and their business in the Far East and Australia has been growing very nicely.

They are seeing strong trends in turnaround maintenance. They're seeing a catchup by refiners on their maintenance projects, and they also have recently announced a large agreement with BP (BP). BP has been using about 100 different companies around the world as contractors for "isolation and intervention" services. In early August, they announced that they were going to reduce their contractors to four, and Furmanite is one of those four contractors that BP will use.

The company is in strong financial condition. They have cash and a nominal amount of debt, and we think that on a two-, three-, five-year basis, there is significant opportunity for growth in the company's revenues and its earnings.

Another company that we're investing in is Innovative Solutions & Support (ISSC), which is a company in the aircraft instrumentation business. They design and manufacture flight guidance and cockpit display systems for aircraft manufacturers and retrofit applications. Over the last couple of years, the company has focused on research and development of new programs that address large markets, and those programs are about fully developed now and ready to provide a catalyst for growth at Innovative Solutions.

They've developed a flat panel display system for the Boeing (BA) 737. This upgrade of the instrumentation and flight data system can be performed in 24 hours. The potential market for this product is about a thousand 737s currently in service. They also have a relationship with Eclipse Aerospace, which is a manufacturer of a small jet, which they will begin to deliver in 2013. Every Eclipse will be equipped with Innovative Solutions' flight display system.

Finally, they are working on a couple of military programs, including a systems approach, which we think could provide a significant boost to the company's revenue over the next couple of years. Again, an extremely strong balance sheet, the company has about $2.60 a share in cash, no debt and the share price is about $4.

TWST: What would prompt an exit from a holding for Axiom? Are there any recent examples to share?

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