When I invest in companies, I always look for long-term quality growth shares that have competitive advantages and are run by a solid management team. Whilst there are few I could list such as Appen Ltd (ASX: APX) and Nearmap Ltd (ASX: NEA), I believe that Electro Optic Systems Hldg Ltd (ASX: EOS) has the brightest future ahead and will hammer the All Ordinaries Index (ASX: XAO) over the next few years.
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What does Electro Optic Systems do?
Electro Optic Systems is Australia's largest aerospace entity and largest defence exporter in the Southern Hemisphere, specialising in defence, space, and communications technology.
The company designs, manufactures and delivers battle-proven technology that can leverage a country's position and influence on the world stage. Key applications include telescopes and dome enclosures, laser satellite tracking systems, and fire control systems.
Global reach
Strategic alliances with military enterprises such as NASDAQ-listed behemoth Northrop Grumman is one sure way to make a statement. The company's participation in the B-21 strategic bomber program (whereby the US plan to acquire 100 of these long range tactical aircraft) will come at a cost of roughly US$550 million per unit. No doubt this will be a massive cash injection for Electro Optic Systems in the near future. To put it in perspective, that slice of the pie could be worth a potential US$55 billion ($76.8 billion).
Also noteworthy is Electro Optic Systems partnership with Elon Musk's company SpaceX. With the recent launches of its Falcon 9 rocket, docking with the International Space Station could not have been possible without the use of Electro Optic's sensory equipment. This technology tracks space junk that allows the rocket to simulate a flight path that won't be hazardous during its voyage.
Last year, Electro Optic Systems delivered $160 million of exports to our partners and allies such as the United States, Singapore and the Netherlands. This represented 95% of its products and services.
In late June, the Morrison government stood at the company's Hume manufacturing facility and announced Australia's 2020 Force Structure Plan – a bold statement recognising Electro Optic Systems as a pivotal part of the country's strategic defence plans. The $270 billion in defence spending over the next 10 years will benefit Electro Optic Systems, with the government committing to purchase 251 remote weapon stations, a deal worth to be close to $100 million.
Is the Electro Optic Systems share price a buy?
In its latest quarterly earnings statement, Electro Optic Systems declared that the company expects to report a net loss of $18.2 million in its H1 financial results. Whist this may seem like concerning news, the company has forecast a strong and positive second half with FY2020 profit to fall in between the range of $20-$30 million earnings before interest and taxes (EBIT) – consistent with its prior guidance of $27 million EBIT.
Although revenue has been deferred, orders remain firm with $620 million worth of backlog products and $3.1 billion in the pipeline. Electro Optic Systems also has an unrestricted cash balance of $128 million to see it through the COVID-19 pandemic.
Foolish takeaway
As the theatre of war always looms in global events and dominates media news, countries will always invest in defence capabilities. And with the launch of US President Trump's Space Force, I see great potential in its development and collaboration with other global entities.
Fostering these strategic alliances, combined with a strong management team with expertise within the defence and telecommunications sector, is a fool-proof way to run a solid company, in my opinion.
I think that the Electro Optic Systems share price is undervalued at its current level of $5.71 (at the time of writing) – a fall of 47% from its all-time high of $10.80. This represents a great opportunity for a buy and long-term hold investor.
