Taylor Devices: Record Fundamentals, Reduced Cyclicality, Undervalued Shares

Investment Thesis - Taylor Devices designs and manufactures shock absorption, rate control, and energy storage products, with Aerospace & Defense (A&D) being the largest and fastest-growing revenue category, contributing 60% of revenues and growing 71% in the last two quarters of FY24 [3][5] - The company has achieved record revenues and backlog, with margins widening and cash position nearing 20% of market cap, while carrying zero debt and engaging in share buybacks [3][20] - Despite a 130% increase in stock price year-to-date, shares remain attractively priced for further upside due to strong free cash flow potential [3] Revenue Dynamics - A&D revenues have shown a significant shift, comprising over 70% of backlog in 2024, indicating strong demand and stability due to contract-based nature [5][6] - The U.S. market accounted for 86% of revenues in 2024, with total sales in the U.S. increasing by 18%, while sales to Asia decreased by 55% [7][8] - The cyclicality of Structural revenues is expected to improve with increased backlog and the introduction of new products, such as the Taylor Dampened Moment Frame [9] Market Trends - Increased global conflicts and defense spending, particularly in the U.S. and EU, are driving growth in the A&D sector, with the commercial and military space industry projected to reach nearly $1 trillion by 2030 [8] - The A&D segment's recurring revenue model is expected to reduce overall cyclicality for Taylor Devices, providing more stability during economic downturns [8] Competitive Positioning - Taylor Devices holds a strong market position with proprietary products and technology, supported by 10 patents expiring up to 2040, creating competitive barriers [10][11] - The company has established long-term customer relationships and benefits from government-funded product development, enhancing its competitive durability [10] Financial Performance - The company has achieved record highs in operating income, net income, and free cash flow in 2024, with operating leverage at its strongest in a decade [12] - Returns on capital and margins have significantly improved, effectively doubling the company's 5-year averages [12] Future Outlook - Revenue growth is expected to average 7.5% annually over the next decade, with gross margins projected to remain in the mid-40s [21] - Estimated free cash flow margins are anticipated to average 10% through the forecast period, with shares currently trading at a 34% discount to intrinsic value [22]