Is the Electro Optic Systems share price now a massive bargain or a falling knife?

Could Electro Optic Systems still make a comeback from here?

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When Neil Armstrong first stepped on the moon, he said, "That's one small step for man, one giant leap for mankind". Since that day, countless others have turned their heads towards the skies and dreamed of reaching space.

Unfortunately, that dream appears to have been one step too far for Electro Optic Systems (ASX: EOS) and its share price on Thursday.

At the time of writing, shares in the defence and space systems company are swapping hands for 51.5 cents apiece. This means the Electro Optic Systems share price is down 28.5% from yesterday's closing price.

What occurred today?

Today, Electro Optic Systems released its results for the first half of the 2022 financial year. They were the very first set of results under the helm of new chief executive Andreas Schwer, who joined the company just over a month ago. 

It was Clive Cuthell, the new company CFO, who had the harder task, releasing a disappointing set of results only three days after joining the company.

The Motley Fool Australia reported on the first half results earlier today. In short, whatever way you look at it, it was an ugly set of numbers.

In the company's defence, many of the reasons for the poor results were out of its control. Delayed customer contract awards and supply chain challenges meant it was hard for the company to win new projects, and also caused delays in existing projects. It's hard to deliver a remote weapon system and turret to a customer when the customer hasn't already received the vehicle it is to be installed upon.

However, the major story is not the numbers but a significant shift in its strategy.

A change of plans

For the better part of a year, the major focus for Electro Optic Systems has been its mid-Earth orbit satellite constellation known as 'Spacelink'.

The company claimed that Spacelink when launched, would be able to offer continuous, real-time data connectivity to satellites. The issue is that Spacelink also required significant capital, a task made harder by capital markets drying up for such projects.

It appears this capital might have been for nothing, with the new management setting December 2022 as the day of reckoning when Spacelink must be sold. If it can't be sold, management will look at all other options, including liquidating the business. Either way, Spacelink will no longer be a priority, and a $54.4 million write-down will be hitting the company's books.

Instead, Electro Optic Systems appears to want to keep its feet on the ground.

Steps forward for the Electro Optic Systems share price

In short, quite like many other former highflyers, the company is drawing a line in the sand and focusing on profit. Still, management is also keen to stress that it isn't all doom and gloom.

Firstly, Electro Optic Systems has not lost any of the contracts it has been awarded. In fact, it has some new opportunities in the pipeline. One example is the potential to offer remote weapon systems to Ukraine. This might provide a short-term boost to revenue whilst it waits for delays in its other contracts to subside.

If Electro Optic Systems can get this shift right, a new, more profitable, and lower-risk version of the company could arise. Albeit possibly one with lower growth potential. 

However, this requires a bit of faith from investors. Many of whom may find such faith in short supply given the company's financial and stock price performance over the last year.

The Electro Optic Systems share price is back to where it was when revenue was only a fraction of what it is now. If it can become a profitable and more sustainable company, this might be an interesting entry point for those willing to take the risk and be (very) patient.

It could take years for the company to return to a better place, and there are a lot of obstacles it will need to overcome in the meantime.

Motley Fool contributor Andrew Legget has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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