Park Electrochemical.

Mercurywave Uptake Pushes Slightly to Right, But Big Earnings Growth on Horizon

INVESTMENT HIGHLIGHTS: While F4Q resulted in a slight miss (more top-line than bottom-line) due in part to a slower-than-expected recovery in the Electronics segment, PKE is well positioned for growth to return in both segments in F18 with healthy acceleration in F19 (and beyond). Bolstering our comfort is the strength of the ultimate OEM customers (in Huawei and GE and others), which should provide the necessary catalysts for the expected revenue growth in the next 5-12mos. As we look forward, we expect material margin and earnings expansion in addition to more significant return of capital to shareholders ($10.70/share net cash on books) through repatriation tax reform under the Trump administration. Reiterate Buy.

·         A slight disappointing miss. On 5/2, PKE reported F4Q results of $27.6M/$0.13 vs. Street of $29.9M/$0.14 (and our prior $29.7M/$0.13) as demand in Electronics underperformed our recovery expectations while profitability aided by leaner OpEx.

·         Margins starting to improve, restructuring will drive further expansion. GM of 26.8% were above our 26.0% est. (and +170bps q/q) due slightly to improved revs and cost cuts. Opex spend was down as % of revs (-40bps) q/q, allowing for OpM uptick to 9.8% (from 7.7% in Nov.). Restructuring in Electronics (announced 4/18, $0.1M incurred in F4Q) may cost $5-6M over 6mos, with $3-3.5M savings per annum.

·         Electronics uptick was slow in F4Q but should still materialize in F17. While total Electronics sales remain at low/depressed levels (6th consecutive negative y/y comp) at only ~$19M in revs (94% of which was high performance), the prior F3Q seems to have been established as trough as sequential improvements materialized. Interest in the relatively newer Meteorwave line is quite healthy with 7 OEM agreements in place, 19 under negotiation, 15 qualifications completed, 22 in qualification process, and 54 OEMs that have now tested. Efforts to work more directly with OEMs generating resurgence in biz oppty (as needed) which should provide multi-qtr/yr offset to legacy declines, starting in 2HF18.

·         Aero another qtr closer to stronger growth momentum. Aero was ~$8.2M (30% of biz) and up ~9% q/q (although -7% y/y) despite the fact the GE inventory issue has not subsided quite yet. Biz will continue to grow incrementally through C17 while ramping more significantly in C18. Many opps with GE, Textron and other unnamed customers still offer oppty for $100M+ run rate/yr by 2020/21.

·         Adjusting forecast, growth momentum slight push to right. PKE saw stable Electronics demand for initial 2mos in May qtr as Mercurywave uptake seems to have been slightly pushed right (12-mo views remain very positive) while Aero should continue to have positive y/y comps before accelerating in C18. Our F1Q now $28.3M/$0.13 vs. prior $31.9M/$0.17. F18 now $121M/$0.74 (with upside to $0.80-1.00) vs. prior $136M/$0.89.

Sean K.F. Hannan
Needham & Company, LLC
(617) 457-0906
shannan@needhamco.com