The Breakdown of LaBarge

...I wrote an article this past summer (July 2005) for a major financial website that will remain nameless but have since been informed that the article will not run so I now have the authority to post it here. I was going to post the article on this site after it was released for publication. As you may notice, the style of writing in this article is slightly different from my “to the point” writing on typical case studies (it contains more fluff than I like). Sometimes the mainstream media and financial publications need a certain appeal for their audience. I typically write what I think and what I see and worry about political correctness and proper article layout later. As long time members of the community already know, LaBarge (LB) was a major part of the screens throughout the first half of the year before hitting sell points and red flags (it is an MSW All-Star with a 134% gain in eight months). Enjoy the breakdown of LaBarge from my July 2005 article analysis:

The Breakdown of LaBarge
by Chris Perruna
Founder and President
MarketStockWatch.com
MSW Financial, LLC Company

Whether you are launching into space, cruising through the dessert or swimming in the artic, harsh environmental conditions will try to stop you in your path. High performance electronics and interconnect systems will allow you to continue your journey but where do we find such awesome devices. Just ask your local government, phone the nearest military base or walk on over to NASA.

Incorporated in 1968 and based out of St. Louis Missouri, LaBarge (LB) provides the military, NASA and private companies such as Boeing (BA) and Raytheon with these types of complete electronic systems solutions, circuit card assemblies and high-level assemblies for specialized applications. The majority of Labarge’s customers belong to the defense, aerospace, natural resources and industrial industries. Its products are used in various technology applications, including military communication and radar systems, military and commercial aircraft, satellites, space launch vehicles, down-hole instrumentation in oil and gas wells, and mail sorting equipment. In fiscal year 2004, 48% of LaBarge’s revenues were generated from defense customers, 14% from natural resource customers, 13% from industrial customers and 10% from customers in the government systems market.

With a market cap of $313 million and 980 employees, CEO Craig LaBarge has guided the stock to new 52-week highs by increasing sales and earnings year over year. Revenues are up over 67% versus the same quarter last year while net income has advanced by 93% during the same time period. Mr. LaBarge gives his investors a good feeling by producing a return on equity of 19% while jump-starting earnings per share by almost 89% versus the same quarter one year ago. This year (2005), LaBarge is expected to report EPS of $0.67, $0.82 next year and just short of $1.00 at $0.98 in 2007. Building on the past (2003: $0.23, 2004: $0.45), it is evident that LaBarge is on track to sustain growth for many years to come especially with its new memberships to the Russell 3000 Index, the Russell 2000 index and the New Russell Microcap Index.

Looking at a simple daily or weekly chart, you can see that LaBarge has almost tripled in price during the past year with a 100% gain in the past six months. Where should an investor enter a stock that looks to be extended from safer buying territory? Further analysis will provide us with a clue that LaBarge has received support at the 50-day moving average since March 2005 and the 200-day moving average since 2003. The stock has been recording higher highs and higher lows since the New Year and it has done so in convincing fashion. A breakdown of any of these long term support lines should concern you and raise a red flag as I like to say.

When buying a small cap stock, I prefer to see strong cash flow and LaBarge provides us with cash flow that exceeds the industry average by almost 98%. Belonging to the electrical equipment industry, LaBarge shares company with other names such as Agilent Technologies, Inc (A), Fisher Scientific International (FSH)., and Garmin Ltd (GRMN). The industry as a whole hasn’t performed extremely well but LaBarge, an undiscovered gem on Wall Street, still has room to growth and give investors a reason to smile. As of April 2005, only 27 institutional investors have placed a position in LaBarge, fifteen of them being money managers and 10 of them being mutual funds. To put the numbers of institutions into perspective, Boeing, a client of LaBarge, has over 1,750 institutional investors from Wall Street.

Is LaBarge undervalued? The price-to-sales ratios suggest that the company has room to grow since it is lower than the S&P 500 average and well below the industry average. The P/E ratio also suggests that the stock is undervalued compared to the industry average and evenly valued when compared to the S&P 500. I do raise an eyebrow when studying the liquidity of the company; it seems to be weak and may lack the ability to cover short term cash needs. If the company runs into revenue decreases or other financial difficulties, the lack of liquidity can hurt the company and the underlying stock price. The balance sheet can offer us a better look into the quality of the company and how management handles business. Total cash has decreased from Q2 2004 to Q2 2005 from 8.68M to 0.30M as debt has increased from 6.87M to 37.95M. However, total assets have increase from 75.39M to 124.49 during the same time period.

LaBarge crossed above $20 for the first time ever but pulled back at the end of last week. The 50-day moving average sits at $16.64 and support is holding strong at this invisible line. A healthy pullback to the moving average in below average volume could signal investors a new entry position or present an opportunity to add additional shares to an existing position. Eventually LaBarge will have to correct but I wouldn’t speculate when other small caps such as Hansen Natural Corp. (HANS) have moved from $5 to $105 in less than two years without a major correction. As a current shareholder in LaBarge, I will be staying put until I see any major red flags or warning signs to sell the stock such as a break of the 50-day moving average on above average volume.

As they say in poker, “Know when to hold them and know when to fold them” and I won’t be folding this hand anytime soon unless conditions change drastically. For a further look into the company, please take the time to visit their website (http://www.labarge.com/) and learn for yourself how LaBarge may someday lead us into further oil and/or space exploration. We now know that temperature doesn’t matter when it comes to their products, so take a break from the extreme summer heat of 2005 and aim to make some cold hard cash with this growth stock.