Sparton (SPA) Bags $4.5 Million in Real Estate Sale

SPA management continues to execute on those things that are within its ability to control. The sale of the company's last piece of unused real estate (in New Mexico) for $4.5 million is another example of this. As a result of this sale, it seems to me that SPA's cash balance for 11FQ2 (ends December 31) could well be back above the $30 million level (almost exactly $3.00 per share) after internally-generated FCF is included. That would compare to $27.3 million (Bloomberg basis) in 11FQ1. There is also some "restricted cash" related to environmental liabilities that either is or will soon be available to count as cash on hand.

Meanwhile, the current quarter has seen several nice sonobuoy R&D contracts let by the Defense Department. This should provide a solid backlog level going forward for the company's defense segment.

Given the economic environment, though, the company's operations are not without headwinds. The Medical Division had a weak performance in the September quarter, in my view, given the additional revenue gained from the August 2010 acquisition of Delphi. In addition, the EMS division continues to struggle with margin issues in what is without a doubt a naturally tough business even in good times. Nevertheless, decent performance at those divisions should allow SPA to generate a very nice amount of FCF given my expectation of continued strong results at the defense division.

On the 11FQ1 earnings conference call, management reiterated that it continues to look at many potential acquisitions, but that thew company intends to remain very disciplined in deploying the company's very hard-earned cash and capital resources.

With the stock at $8 currently, and cash likely at around $3.00 per share, the business is available for the equivalent of about $5.00 per share. By comparison, I expect the company to be generating on the order of $0.80 per share in FCF in the current fiscal year, with the potential to generate $1.00 per share in FCF in FY2012 (ends June 30, 2012) visible before long. That leaves the stock at its current level still quite cheap, in my view.

Jay Hains/aa