We last covered the band Coda Octopus (NASDAQ: CODA) in 2019 highlighting this profitable and fundamentally strong micro-cap as a niche industry leader. The company specializes in sonar imaging technology with various applications across the military and defense industry, energy, mining and offshore construction.
The stock hasn’t done much since our article, with stocks nearly flat from pre-pandemic levels beyond a swing in volatility last year. That being said, our update today recaps some recent developments, including a positive earnings trend with rising margins, which is particularly impressive in a challenging macro environment.
Indeed, the stock has gained momentum in recent months on some optimism that next-generation products and ongoing growth initiatives will help the company further cement its market share. In our view, CODA may still be undervalued, with the market still viewing CODA as an “industrial” player while its high-tech solutions deserve a higher premium.
CODA key measures
The company last reported third-quarter results in January with EPS of $0.16, compared to $0.14 for the year-ago period. Revenue of $6.3 million, up 8% year-over-year as management found success in its “Echoscope” and “Diver Augmented Vision Display” system products.
Another dynamic here is the “Services” segment of the company, which represents about a third of the activity, where sales increased even more strongly by 14.2%. The dynamic turnover coupled with an effort to control costs and logistics efficiency enabled the operating margin to reach 32.3%.
CODA ended the last quarter with $21.3 million in cash against marginal long-term debt of $100,000. The balance sheet position is, in our view, a strong point of the company’s investment profile.
With fourth quarter results yet to be released, the company is forecasting full-year 2022 revenue of $17.1 million, down from 5% in 2021 on a like-for-like basis. Keep in mind that earnings for the year 2021 included a one-time benefit from the federal stimulus that year, which skewed financial results as the company does not reconcile adjusted results.
Nevertheless, the conclusion is that underlying profitability is moving in the right direction. Management’s comments suggest optimism for stronger growth in the future.
Some of the company’s catalysts include pressure from US Navy contractors and the Department of Defense to integrate more digital and augmented reality solutions. With the Echoscope PIPE sonars, the big breakthrough was “5D and 6D imaging” with on-board processing. The company believes there is a significant opportunity in real-time volumetric imaging versus legacy solutions that are often 2D images with no depth or mapping.
The point of sale becomes the value proposition to customers who can operate faster and more efficiently. In segments such as offshore construction, completing a job in fewer days or weeks can translate into millions of dollars in savings, which is positive for project ROI.
CODA Stock Price Prediction
With a single earnings estimate released by Wall Street for CODA projecting 2023 EPS of $0.55, the stock is trading at a forward P/E of around 13x. Annualizing the third quarter results may also result in a full year earnings estimate of $0.64, improving the P/E multiple closer to 11x. We believe these multiples are compelling given the combination of steady growth, recurring profitability, positive underlying free cash flow, zero debt and the company’s position in the within a single market segment.
The appeal here is that CODA has relative diversification into various end-customer sectors while transforming itself into a robotics technology company by pushing the boundaries of R&D from specialized equipment. All this to say that stocks deserve a higher premium under the stock’s bullish scenario.
From the chart, we are seeing stocks approaching a break above $7.50, which represented an important technical level dating back to 2020. The interpretation here is that the market recognizes the strength of the company that adds to the momentum.
There is reason to believe that the outlook and fundamentals are stronger now than they were in 2021, which means that the cycle top around $10.00 could be back on the table as a upward target price. Our price target implies a market cap approaching $100 million as a benchmark.
The next step will be to follow the next fourth quarter earnings report, which is expected to be released in late January or early February, although a date has yet to be confirmed. Management updates on the current operating environment will be critical, along with margins and cash flow trends as watch points. Continued execution should be positive for the stock.
In terms of risks, a breakout of the stock moving below $6.00 as a support level would likely reflect deteriorating sentiment, signaling a weaker outlook. We talked about the company’s diversified exposure. The oil and gas industry is important to CODA with global majors as current clients. A sharp drop in energy prices could impact demand for the CODA investment cycle and equipment. Likewise, the company remains connected to global macro trends. A scenario of a worsening global recession would likely impact sales trends and drive stocks lower.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these actions.