CPNE- When I Drill Deeper, It Just Gets Better

I have now had a chance to review the 10Q filing for Q2. A couple of issues really jumped out at me, and they make the profit picture here even more compelling.

Here’s a few facts about this company’s income statement. First, they generated $7 million in revenues with a cost of goods of less than $1 million- gross profits are running 85%- that’s a huge margin.

Secondly, SG&A (the corporate overhead) only ran $3.6 million against a gross profit of $6 million- they should have netted $2.4 million in profits- instead it was only $1.4 million. So where did the money go?

The money went to $1 million in interest in the quarter, which seems absurd and usurous on about $2 million in debt. I have to assume there was some sort of prepayment penalty for paying off the debt so rapidly. It’s the only possible explanation.

Therefore, if the company can simply match the Q2 performance in Q3, the net profits should come out somewhere in the $2.4 million range, or EPS of .055 for one quarter.

A repeat of Q2 in Q3 would be a victory, as the summer months are seasonally slower for this company. If revenues stay the same, profits should soar.

Here’s a couple of Wall Street acronyms that CPNE is loaded with: GARP- Growth at a reasonable price, and ARG- Accelerating Revenue Growth- Investors love these characteristics in a stock.

Here’s a look at the chart in the early going this AM.

cpne3.gif

As you can see, the stock is surging to another multi month high, just eclipsing the level from which the capitulation occurred last year. There is huge volume- over 800,000 shares have traded in the first 20 miinutes of trading- this suggests the stock could have the highest volume in its history today. Maybe not, as I would expect the majority of the volume to come in the early hours. We would need to surpass 4.5 million for the best volume ever.

There is no big gap in the chart, which is encouraging for higher levels. So, if you don’t own or or want to own more, do you buy more here?

That’s a very tough question. Here’s my suggestion- Since the stock is fairly extended over the past few days, I would suggest taking a partial position- perhaps 1/3 or 1/2 of what you want to invest in case it decides to pull back. There is probably some pent up demand to sell, as everything has been trading poorly of late.

If you own it much cheaper should you sell? If the profit is irresistable to you, I would suggest taking a partial profit and setting that capital aside to buy the stock back later in case it does pull back.

Fundamentally, if the performance continues, this company is worth a lot more by any fundamental valuation. A couple more quarters like this, and I believe this company is a likely buy out candidate.

A big shining star in an otherwise dismal summer sky. Comments and questions are welcome.

4 thoughts on “CPNE- When I Drill Deeper, It Just Gets Better

  1. Your analysis is right on. As for me, I’m staying put. How could you not like these results and I see no reason next quarter should be any less. I hope.

    Editor: Thanks for you comment. This has been a really good one during a tough market. I love it. 

  2. I get the feeling with momentum for this stock could push it up to were it might become unreasonably priced maybe to about $ 3.00 per share . I have seen this many times before with a lot of stocks that were built on hype and not earnings . The most recent one I,ve seen is CWPC 52 week range is .61 to $ 8.90 and now its back down to $ 3.66 from its high 3 months ago. Who knows what may happen !!

    Editor: If you read the BLOG, you know I am suggesting caution at these levels. However, I would love it if this stock eventually becomes “overvalued”. That would be great. Someone can buy your shares at $3, and you can go out and find something else undervalued and wait for it to become overvalued. 

  3. That are the numbers of a promising company.
    Numbers are very good, and wise decision to pay of the debt. Not planning to sell. Let the numbers decide. Kind regards

    Editor: I agree- Q3 profits should be excellent. Will have some updates well before the fact. 

  4. With the impressive results of CPNE in mind, the time is right to step in. And I think investors are realizing that. When I think of CPNE I think of the lessons of O’neal–one of my favorites. This company is making excellent results. Thanks.

    Editor: In the words of someone who I can’t remember- you ain’t seen nothing yet baby. I can’t guaranttee where the stock is going, but the next quarterly numbers out of this company should be very exciting.