I don't hold Droneshield - and never have - but have recently been on the hunt for value stocks and this one came across my desk. Was interested to see other people's views on whether it is 'richly valued' but didn't find much on this thread. I am no expert but here is my take in case it helps someone looking for some information that otherwise may not be available to them. I don't look for likes, I do this because it also helps me work through the opportunities and put my thoughts on paper. Bear in mind that all of the info below does not guarantee the share price will move up, as there are other factors (wars, interest rates, inflation, fear, greed) that hold more bearing.
Technical indicators:
There has been quite a large price rise and fall in 2024, however the technical indicators show there is a high likelihood (60%+) that the price has bottomed out at 95c and upward pressure could continue past its current price of $1.17. There's certainly been worse times to buy.
Fundamental indicators:
Moving to the fundamentals, I also see a lot of encouraging green lights:
- the company is financially very healthy, with an excellent balance sheet. To convey this in terms most will understand, imagine yourself in this situation: you have $56M in your bank account, you have around $25M of stuff lying around that you could sell on EBAY quickly if you needed to, but you have expenses of around $20M to pay this year. Last year you made $9M profit after all expenses and costs. On top of that, you have zero debt (loans) to pay any interest on. If you decided to throw the whole business away tomorrow, and sold everything and paid everyone you needed to pay, you'd walk away with $74.5M. In my opinion that is a very healthy balance sheet - especially considering in 2022 the company actually lost money. Quite a big turnaround, and this helps explain the share price rise in 2024 as punters cottoned on to the company becoming profitable in 2023.
- looking forward, things look promising to me. At 30 June 2024, the company now has a cash balance of $146M - still with no debt. They have $28M of orders already on the books, and will need to use some of the cash to buy inventory. They have hired a lot of new staff and are taking out leases to provide more business space for their operations, but they believe these costs can easily be absorbed due to increased sales. If we believe everything in the company reports, it's another green light.
Management:
This is super important as bad management can lead to atrocious decisions relating to business direction and financial management. We can see that both the CEO and CFO have been in the company for several years, which is a great sign. The CEO Oleg Vornik has a tenure of 7.6 years, and the CFO Carlo Balanco has a tenure of 5 years. Oleg is being rewarded with $2.9M annual compensation (salary + performance bonuses and shares etc), compared to 18 months ago when he was "only" pulling $500k. Given the recent financial performance of the company we can expect Oleg to be handsomedly rewarded. In terms of insider ownership, there's not a lot of data immediately apparent as to how many shares the Directors and Board members are holding- and whether they are selling more than they are buying. I can see that insiders have sold more than $17M worth of stock in the last 12 months, but there is not a lot of information on buying.
Share ownership:
Insiders hold 7% of the company which is great - they have some skin in the game. The general public hold 87% of the shares on the register, and institutions only hold 1.28%. Corporations hold 4% or so. Some punters may argue that higher institutional ownership would be great, but maybe at this stage the insto's want to see more years of profit and a higher market cap (currently $1B) or continued profits before buying in?
PE ratio:
The PE Ratio is currently 109. That means you - as a shareholder - are paying $109 for every $1 the company earns. It is best to compare the PE Ratio with peers in the same sector because some sectors run at notoriously high PEs. It is hard to make a comparison in this area, and I note some peers are running at 120 (Paras) and 150 (Austal). Both Austal and Droneshield have >40% earnings growth forecasts going forward, so high PEs may be expected. I note Tesla currently has a PE of 55 with a 17% earnings growth forecast, and Nvidia has 79 with an earnings growth forecast of 23%. Tesla and Nvidia are not comparable companies to Droneshield but I have included just to give a comparison of PEs to earnings forecasts as those companies both have an element of 'hype' to them.
Most of Droneshield's business comes from overseas (USA etc), so when weighing up risk we need to think of the likelihood of continued strong demand coming from the USA and other countries. I have not looked into this, and maybe others can comment on this. I would also like to know just how good Droneshield's products are and whether strong competition threats are looming.
To summarise - there's risk in everything, I am still not sure whether I will buy this one myself, and none of this is a recommendation to buy, sell or hold. We have seen quite a large fall in the share price recently, from $2.70 to $0.95c, and it has now shown a good bounce back to $1.17. The balance sheet is strong and the company is optimistic going forwards, but we are running at a fairly high PE ratio. Having said that, when the share price was $2.70 (March 2023) the PE Ratio was 3,694 (which is getting unrealistic but shows the hype that can occur around Droneshield). The global average PE Ratio in the Aerospace and Defence sector is only 35 - so keep that in mind when you weigh up a decision to buy this one.
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