VirTra: A Way To Play Military And Law Enforcement - Seeking Alpha
Summary
- VirTra operates as a provider of firearms and other training systems.
- Recent performance from the firm has been generally positive and the future for the company will probably show continued signs of improvement.
- Shares could look very cheap based on current trends, but there is a risk that a reversion to prior year results could make shares expensive.
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Something that should be uncontroversial is the idea that any society that arms itself should also train itself to use those arms properly. Fortunately, there are companies out there that help to facilitate this. And one of them is a firm called VirTra (VTSI). In recent years, management has succeeded in growing the company's revenue at a slow, but steady pace. Its bottom-line figures have been all over the map, but generally growing more positive year after year. So far this year, things are looking up for the business as well. Ultimately, I suspect the company will do well for shareholders down the road. But this does not mean that it makes for an ideal investment prospect at this time. Though the future of the company might be bright, shares in the business are trading at levels that are quite expensive if we assume the current year's results are temporary. Because of this, investors in the firm should tread cautiously.
Taking aim at VirTra
VirTra’s business focuses around providing judgmental use of force training simulators, firearms training simulators, and driving simulators for law enforcement, the military, and for educational and commercial markets. The ultimate goal here is to teach those in military and law enforcement, as well as others, how to properly handle firearms and other related technologies. Today, the company's technologies are available in over 30 different countries. Most recently, the firm received an invitation from the Canadian government for it to offer to provide its technology solutions for their defense forces.
While alternative solutions do exist, the company's firearms training simulator allows for training to take place without requiring the existence of a shooting range, protective equipment, role players, safety officers, and other personnel and resources. Similarly, its driving training simulator offers all of the same advantages that is firearms training simulator does. In addition to selling these products, and servicing them, the company is also engaged in licensing out its technology to a company called That’s Eatertainment Corp, which is a developer and operator of a combined dining and entertainment concept that is focused on the indoor shooting experience.
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Over the past few years, management has done well to grow the company's top line. However, that growth has been slow. Revenue in 2016 totaled $15.65 million. By 2020, it had grown to $19.09 million, implying an annualized growth rate of 5.1%. Each year, revenue was greater than the year before it. That is a bit uncommon for a company so small where even one or two customer contracts can make or break a year. Only has the company succeeded in growing consistently in prior years, it is also doing so this year. Revenue in the first nine months of its 2021 fiscal year, for instance, came in at $15.79 million. That represents an increase of 26.1% compared to the $12.52 million the company generated the same time one year earlier. It is worth noting that this attractive growth took place even as revenue in the latest quarter contracted, falling by 5% from $6.41 million to $6.09 million. Worth noting that the company ended its latest quarter with backlog of $21.7 million. This compares favorably to the $14.4 million in backlog the company reported the same time one year earlier.
It would be great if profitability figures could be as consistent as revenue has been, but that is simply too much to ask at this time. After seeing net income rise from $2.05 million in 2016 to $3.26 million in 2017, it began a two-year descent, eventually bottoming out at a slight loss of $0.08 million in 2019. Fortunately, profitability rebounded in 2020, with net income ending the year up $1.48 million. A similar trajectory has been seen when it comes to operating cash flow. Its peak year was in 2017 when the company reported operating cash flow of $2.65 million. By 2019, it had fallen to a negative $1.91 million. But that, too, was short lived. In 2020, the company generate a positive cash flow in the amount of $2.25 million.
We should also pay attention to a couple other things here. For starters, operating cash flow can be volatile from year to year based on changes in working capital. If we adjust for those, operating cash flow in 2020 was actually higher, coming in at $3.19 million for the year. Another profitability metric to pay attention to is EBITDA. 2020 actually marked a high year for the business on this front, with that metric coming in at $2.79 million. The previous high mark was in 2016 when the company reported EBITDA of $2.51 million.
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For the current fiscal year, profitability is actually looking really strong. According to management, net income in the current fiscal year is $2.53 million. That compares to a loss of $0.12 million in the same nine months of 2020. Operating cash flow went from a negative $0.17 million to a positive $1.36 million, while the adjusted equivalent went from a positive $0.88 million 3 positive $2.38 million. Over that same window of time, EBITDA turned from a positive $0.62 million to a positive $2.28 million.
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Valuing a company like this can be a bit tricky. For instance, if we analyze the company's results for the current fiscal year, then shares look pretty cheap, trading at a price to operating cash flow multiple of 9 and at an even lower EV to EBITDA multiple of 6.3. However, the lack of consistency leads me to worry that this might be a temporary pop and profitability that might not be replicated in future years. If so, this could be painful. If, instead, we were to rely on figures reported for 2020, shares don't look as cheap. On that basis, the company would be trading at a price to adjusted operating cash flow multiple of 24.4. And its EV to EBITDA multiple would be 23.2.
Takeaway
VirTra strikes me as an odd company from a valuation perspective. I don't like to have to assume that in order for it to be attractive that a recent uptick in profitability that could not be forecasted might stick around for the foreseeable future. This is certainly possible, but if results revert back to what we saw in 2020, shares are looking rather expensive. Fortunately, investors would be buying a firm that has demonstrated continued revenue expansion. And that should bode well for the long haul. Another benefit is that cash in excess of debt is worth almost $13 million, which means that the actual risk of a permanent loss of capital for shareholders is rather limited. For me, this is not an ideal opportunity to buy into. I like prospects that don't require so much of a gamble on a new normal. But for those who do believe that recent performance is indicative of a bright future, now might be the time to buy in.
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This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
source: https://seekingalpha.com/article/4476776-virtra-a-way-to-play-military-and-law-enforcement
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