CVD Equipment Corporation (NASDAQ:CVV) is a small designer, developer and manufacturer of process equipment that provides solutions for pilot, production and R&D applications.
It is coming off a decent quarter, but after bouncing off its 52-week low of $3.68 per share in early July 2022, the thinly traded smallcap has bounced back to trade at a 52-week high of $6.57, and has since traded in a range of approximately $4.75 to $6.50, with a couple of bottoms and tops at those levels.
Based upon current data, there’s nothing I see at this time that would warrant the company breaking out on either side of those numbers anytime soon; it appears everything is priced in at this time.
In this article we’ll look at some of the company’s recent news and numbers and why I think as it stands today, it would be better to be thought of as a potential day trade or swing trade when the news cycle presents it with a temporary catalyst that attracts more volume and moves the price on the up or downside of its current trading range.
Latest news and numbers
Revenue in the third quarter of 2022 was $8.1 million, up from the $4.3 million in revenue from the third quarter of 2021, up $3.8 million or 88.4 percent.
Net income in the reporting period was $63,538 or $0.01 per share, significantly down from the net income of $6 million or $0.89 per share in the same reporting period last year. That isn’t a concern in general because the net income last year came from selling one of its buildings rather than operations.
For the first nine months of the calendar year of 2022, CVV generated revenue of $18.6 million, up from the $11.7 million in revenue it generated in the first nine months of 2021, up $6.9 million or 58.4 percent.Taking into account the aforementioned sale of a building it owned for $6.9 million in gains, and a PPP loan of $2.4 million that was forgiven, it did show more momentum on the operational side in the first nine months of 2022.
The company grew its backlog from $10.4 million as of December 31, 2021, to $15.7 million at the end of the third quarter 2022. While that’s an increase of $5.3 million or 50.9 percent, it does need to be taken into consideration that backlog doesn’t guarantee revenue; it represents potential revenue depending on a number of factors, including funding. Cash and cash equivalents and the end of Q3 2022 was $11.9 million, down $4.8 million from the $16.7 million it held at the end of calendar 2021. For the most part the decline in cash and cash equivalents was from a $2.3 million adjustment in non-cash items, and the $1.8 million it paid to satisfy its mortgage debt on its Central Islip facility earlier in 2022.
Working capital at the end of the third quarter was $15 million, down $1.7 million from the $16.7 million in working capital at the end of calendar 2021.
CVV faces the same headwinds much larger companies continue to face, including uncertain economic conditions in the months ahead, geopolitical issues, supply chain disruptions, materials inflation, rising energy costs, and the impact much of this has had on the aerospace industry, which has had downside impact on the performance of CVV over the last two years.
Taking into account the headwinds listed above, the company rightly stated it cannot in any way predict how things are going to go over the near and long term. That’s why, even after the recent $3.7 million win, there is no surety the company will, any time soon, return to consisent and sustained profitability.
To turn the corner the company will have to win new equipment orders on an ongoing basis, find solutions to current supply chain disruptions, mitigate materials inflation, and find ways to lower operating expenses while deciding on how to go forward with CapEx.
Based upon the current macro-economic environment it operates in and the weakening global economy, it’s going to be extremely difficult for CVV to consitently win orders so it can make cost cutting and spending decisions that align with an upward growth trajectory.
For now, the wins, while welcome, are sporadic and unpredictable, and until that changes, it’s not going to attract investor interest on any large scale. Having said that, if it were to follow up its recent $3.7 million order with some other meaningful wins, it could gain some momentum that would push the share price of the company beyond its recent trading range and help break it break out of its 52-week ceiling. If it is able to do that, the stock would probably have a nice upward run.
At that point investors would take interest and bid the share price up. That wouldn’t be sustainable, but it would put the company’s name on the map and possibly increase daily trading volume.
Based upon the various factors listed above, management believes its current cash and cash equivalents will allow it to fund operations over the next 12 to 18 months.
Assuming the weak economy gets worse, which is highly likely, the management said it’ll take the necessary steps to maintain the company’s operating cash in order to provide the working capital it needs to operate.
Based upon its historical performance, that could happen sooner than later, based upon the timing of new orders and receiving payment for them. That has resulted in an uneven performance from quarter to quarter in the past, and under certain circumstances could put pressure on available capital.For the reasons identified in the article, I can’t see the value in taking a position in CVV; not only from the lack of visibility in the near and long term, but also because it has so little volume on a daily basis that even if there was interest in taking a position, the illiquidity of the stock itself is a risk if it becomes volatile on the up or down side of the move and retail investors can’t get in or out near the price they want.
My conclusion is CVV, as the company stands today, has the potential to be a decent day trade or swing trade, as the company usually moves a lot on the right news. But even there I would be careful because, while the stock does provide some decent price movement at times, it still hasn’t attracted a lot of volume under circumstances that warranted it.
The bottom line is, the best-case scenario is CVV could provide some opportunity for day traders or swing traders, but only if volume spikes well above historical volume, or if the share price takes a nice dip with no news that drove it down. Under that scenario a stock lie CVV will bounce back, providing a quick profit. Again, because of lack of liquidity, I wouldn’t take a big position that could get really tough to get out of, even in optimal conditions.
As for long-term potential, there simply isn’t enough visibility or consistency to justify taking a position in the company. Similar to trading the stock, the only reason to take a position would be if it were to take a big dip that offers a much higher percentage chance of rebounding to prior levels over a longer period of time.
Other than those possibilities, there’s no reason to think long-term with CVV until it grows a backlog that consistently generates a predictable revenue stream shareholders could trust in. I don’t see that happening in the near future, even when the company wins an occasional piece of decent business.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.