ASX military defence and space technology company Electro Optic Systems Hldg Ltd (ASX: EOS) has had a rocky start to 2020.
A string of positive announcements over the backend of 2019 and the beginning of 2020 helped push the EOS share price to an all-time high of $10.80 by early February. At that point, investors who had held EOS shares for 12 months would have been sitting on astronomical gains of well over 300%.
But then the coronavirus happened. Jump forward to the last week of March and all of the gains made over the previous 12 months had been wiped out completely. In the space of just 6 weeks, the EOS share price had collapsed by more than 70%, falling below $3 for the first time since April 2019. And while the EOS share price has staged a recovery in recent weeks – up around 60% to $4.77 as at the time of writing – it's not much consolation to investors who may have been hoping to see it well over $11 by now.
But there are some upsides to the EOS share price continuing to trade at such a heavy discount to its all-time high. For new and existing shareholders, this could be a great opportunity to snap up EOS shares at bargain-basement prices.
Positioning for future growth
EOS had a great FY19, exceeding even its own expectations. For the 12 months ending 31 December 2019, EOS revenues were $166 million, an increase of 91% over the prior year. Earnings before interest and tax (EBIT) skyrocketed 194% to $21.7 million, beating the company's earlier guidance of $20 million.
The company was also positioning itself well for future growth. At the release of its FY19 report at the end of February this year, EOS reaffirmed its FY20 EBIT guidance of between $36 million and $38 million, which would represent annual growth of around 70%. The company's international expansion was also progressing, with its US plant set to start production in mid-2020, and plants in Singapore and the Middle East also set to come online over the next couple of years.
Since then, EOS has been forced to downgrade its EBIT guidance for FY20 to $27 million – which still represents a healthy uptick of 25% growth. The company blamed the downgrade on disruptions to delivery and payments brought about by the coronavirus pandemic, but stated that its overall backlog and pipeline remained unchanged despite the crisis, indicating it expected a strong recovery in FY21.
The company also announced the successful completion of a $134 million institutional placement last week. This strengthens its balance sheet and gives it a significant cash war chest to help navigate the current coronavirus crisis.
Should you buy EOS shares?
In my opinion, EOS is in a pretty strong position despite the global pandemic, and I think the recent pullback in its share price presents a great opportunity to pick up shares in an undervalued company.
The severe disruptions to international travel and trade will pose some difficulties for EOS in the short term, but the company benefits from operating in a sticky sector of the economy. It seems unlikely that many defence contracts will be cancelled, and once travel and trade routes open up again, EOS should be in a great position to quickly expand its production to meet demand.
Given the strength of its balance sheet and its continued growth potential, the biggest thing to consider prior to investing in EOS may be your own ethical standpoint. EOS is a technology company that – among other things – develops advanced military weaponry, and that may not appeal to all investors.
So, while the company seems to have some exciting business prospects ahead of it, think about whether this is a sector of the economy you would be comfortable supporting. If so, I think there's plenty of upside potential to an investment in EOS.
