There are few genuinely original ideas and in lots of cases, creativity involves borrowing an existing idea and applying it to a new area. Investing is no different and this is the basis of Charlie Munger's Lattice Work of Mental Models.
I'm happy to admit that many of my best investing decisions are thanks to listening to the thoughts of others. The only difference between this and simply copying, is that I will always weigh up the investment case and verify research independently.
That doesn't change the fact that often, someone else alerts me to a new stock idea or introduces me to a fresh way of looking at an investment.
I was fortunate with my latest purchase because a fellow investor was generous enough to share their research which helped me look at the stock in a new way.
Adacel Technologies Limited (ASX: ADA) is a tiny company that sells air traffic control systems and air traffic control simulators. It also provides voice technology that can be used to speak directly to aircraft and replace human controllers during training.
The company has a partnership with Lockheed Martin and its air traffic control system, Aurora, is part of a complete solution offered by the $60 billion aerospace multinational. Adacel's voice technology is also being used in Lockheed's Joint Strike Fighter program providing a prestigious showcase for the technology.
Adacel has strong relationships with its customers, the Federal Aviation Administration and the United States Air Force. It is the main provider of air traffic control simulators in the United States, and Aurora is used for monitoring US oceanic airspace.
Adacel is a cyclical business and therefore difficult to value, but is emerging from a prolonged industry downturn thanks to years of spending cuts following the GFC. Also, there are several reasons to think that the long-term demand for Adacel's world class products is likely to grow.
- Air traffic is set to rise over coming decades as flying becomes increasingly accessible to those in the developing world.
- Current air traffic control systems are out of date due to government austerity measures in recent years.
- There is a worldwide shortage of air traffic controllers.
- Unmanned Aerial Vehicles (UAVs) will become widespread, leading to even more congested skies.
- Voice activation is a very efficient way to control both UAVs and other aircraft.
Adacel now has a large base of simulators installed across the world which require regular maintenance and upgrades, and therefore is becoming less reliant on one off setups for income. Its air traffic control system business generates smooth recurring revenues and so it seems unlikely that profits will be as volatile in the future.
On 14 May 2015, the company announced that it expects to deliver a profit before tax (PBT) of $4.5 to $5 million this year. This is on the back of reporting a PBT of just $1.4 million for the first half of the year which suggests the business is gathering momentum.
Adacel has no debt and $7 million in cash and so I estimate that it is trading on a normalised enterprise value to free cash flow ratio of less than 10.
There is no guarantee that Adacel will be able to translate more favourable industry conditions into growing profits and it is difficult to estimate its free cash flows because of its cyclical nature. Despite this, at current prices the downside risk appears well protected.
If you'd rather invest in a company with a more certain and equally positive outlook, then click the link below to find out the name of The Motley Fool's top stock for 2015….
