"...one micro-cap play whose respective equity can largely be viewed as a call option on future aerospace growth. This firm needs very little to go its way during the coming upswing to really move the needle with respect to operating and share-price performance. This company is EDAC Technology Corp, a $20 million market cap (yes, that's not a typo: it's tiny) supplier of precision components (jet engine parts, special tooling, etc.) to the aerospace sector. United Technologies (UTX) is its largest customer at about 44% of revenue, and EDAC has secured a position on the firm's geared turbofan engine (high pressure compressor hubs, turbine disks, etc.), which is turning into a favorite powerplant among commercial OEMs in the narrowbody arena.

The firm is also a supplier on Boeing's 787 Dreamliner (fan cowl, fan blisk) and the Joint Strike Fighter (compressor integrated blade rotors, compressor fan case, etc.). In fact, less than five years ago, EDAC was producing parts for only one client and a single engine, but now the firm is on over ten major engine programs across a wider range of customers. Growth in backlog has been stunning, and thanks to a new multi-year $42 million agreement to supply additional engine parts to a leading European engine maker (announced this year), backlog now stands at over $171 million from about $140 million at the end of 2010 and just over $20 million in 2005--that's about 2.3x the firm's annual revenue run-rate and over 8x its market cap, revealing nice visibility.

EDAC is profitable and has negligible exposure to raw material cost fluctuations (it has a dollar-for-dollar passthrough to customers). Plus, the firm's first-quarter performance showed improvement over last year, and management indicated on the call that its order pipeline remains active. With daily dollar volume at just $44,000, institutional investors will not be too active in this firm's stock, and retail investors should view EDAC's equity as an interesting call option on future aerospace demand. EDAC could reach its previous highs of $6 per share during the coming upswing, offering 50% upside from today's levels."

EDAC’s second-quarter results released Thursday were nothing short of fantastic. The firm’s revenue reached record levels, jumping 16%, while net income almost tripled. Sales in all three of its major product lines improved – EDAC Aero, APEX Machine Tool and EDAC Machinery – while the firm’s bottom line improved materially thanks to more cost-effective manufacturing and a better product mix (gross margin increased 460 basis points in the period). Importantly, if we annualize the quarterly EPS posted in this quarter, the stock is trading at about 8.5 times this year’s earnings, on the heels of growth that nearly tripled in its second quarter. The company’s backlog now stands at $168 million, up from $134 million sequentially (that’s just three months ago), and represents over 6 times its market cap. We believe this backlog to be of the higher-margin variety, and increased throughput should continue to drive margin improvement. Perhaps needless to say, we expect further upside from these levels.