Hickok Incorporated Just Went From “Boring” to “Very Exciting”

Updated 10/9/2021 to reflect current symbol and name

By Maj Soueidan, Co-founder GeoInvesting

On August 9, 2017, we issued a premium tweet stating that we were coding Hickok Incorporated (OTC:HICKA) (now Crawford United Corp (OOTC:CRAWA)) as a GeoBargain and disclosing a small position in its shares. Shares were trading at $5.50 at that time. (The stock is currently trading above $9.00)

Recall that on July 18, 2017, we sent members a small note, talking about how a recent acquisition would significantly increase the size of the company.  We also added the stock to our Tier 1 pink/OTC list on that same day.

Hickok Incorporated is a diversified supplier of industrial parts and solutions.

The company caught our eye because of two acquisitions it made within the last year. We believe the latest of these acquisitions has the potential to meaningfully accelerate HICKA’s business.

Two recent acquisitions:

• On July 7, 2016, the Company announced the acquisition of Federal Hose Manufacturing, a profitable manufacturer and distributor of flexible metal and silicone hoses.  (Please note that Federal Hose was a private company controlled by a director and large shareholder of HICKA, Ed Crawford)

• On June 1, 2017, the Company announced the acquisition of Air Enterprises, an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions.  This acquisition adds more than $30 million in annual revenue and will be immediately accretive.  (Prior to this acquisition, the Company was on a run rate level of around $10 million in annual sales)

We did not add the stock to the GeoBargain list at the time of our original note because we had not interviewed management and we were unsure of the magnitude of the EPS contribution of the acquisition to HICKA’s business.

Luckily, we just recently interviewed management to learn more about the company. Yesterday's results (which added some clarity), along with our interview with management, prompted us to code the stock as a GeoBargain.

We believe that the combination of a low share count, an increased revenue base, and improving profitability could position the company for multiple break out quarters in both sales and EPS.

Quick Facts (as of 8/10/2017)

• Headquarters: 10514 Dupont Avenue, Cleveland, Ohio

• CEO: Brian Powers

• Number of Employees: TBD after filings of Q3 2017 with the SEC

• Key Competitive Advantage: customized and specialized solutions; strong operators

• Price: $7.50

• Insider Ownership: 70%

• Run-rate P/E: We estimate well under 10

• EV/S: TBD after filings of Q3 2017 with the SEC

• P/S run-rate: ~0.5.

• Shares Outstanding: 3 million

• Market Cap: $16 million

HICKA meets 8 out of 10 of GeoNugget Quantitative Criteria (but we anticipate the company will meet all 10 criteria once it files its Q3 numbers with the SEC)

Key

Meets Criteria

Does Not Meet Criteria or TBD

Our Reasons for Optimism

1. We are Impressed with Management

Under the legacy management team, HICKA had not produced consistent top and bottom line growth, as illustrated here.

* adjusted for legal settlement and deferred income tax gains

We really like operators that have private equity experience. It is one of the reasons we own EML and GVP. These types of managers think like investors and this is what initially caught our attention.  HICKA’s entire board has deep roots in capital markets and/or running public companies.  As a group, they own about 70% of the company. You can see the entire line-up in this SEC filing on page 4 & 5, but here are some of them:

Ed Crawford

Edward Crawford has been a large shareholder of HICKA since 2012. He has also been the Chairman of Park-Ohio Holdings Corp. (NASDAQ:PKOH) since 1992

Park-Ohio Holdings Corp. is a diversified international company providing supply chain management outsourcing services, capital equipment used on their production lines and manufactured components used to assemble its products.

Since 1992, PKOH has grown revenues from ~$94 million to $1.4 billion, surviving the 2008 global recession.

Here is a look at PKOH’s chart:

He has also been the Chairman and CEO of The Crawford Group (venture capital, and management company for a group of manufacturing companies) since 1964.

Matthew V. Crawford (Ed’s Son)

Matthew has been a director of HICKA since 2014. He is also the President and Chief Operating Officer of Park-Ohio Holdings Corp. since 2003 and has served as a director of Park-Ohio Holdings Corp. since 1997.  He joins his father as President of The Crawford Group.

Steven Rosen

Steven Rosen has been director of HICKA since March 2012. He has been Co-Chief Executive Officer at Resilience Capital Partners LLC since 2001 and also serves as its Managing Partner. Resilience Capital Partners is a Cleveland-based private equity company that just successfully raised $22.5 million for its third fund. Steven has also been a Director of Park-Ohio Holdings Corp. since November 2011.

Brian Powers

The CEO and Chairman of the Board of HICKA is Brian Powers.  He was appointed as CEO in 2016, in preparation of HICKA beginning to execute its new growth initiatives.

Owner of Brian Powers & Associates LLC since 2001 (management consulting firm); Chief Administrative Officer and General Counsel of Greencastle LLC (developer of data centers and clean energy projects), 2014 to 2015; Managing Director of League Park Advisors LLC (mid-market investment banking firm) from 2010 to 2014; Chief Executive Officer of Caxton Growth Partners LLC (strategic management consulting firm) from 2001 to 2010, and President and Chief Executive Officer of the Company since September 2016. Mr. Powers brings over 20 years of diverse experience as a business executive, entrepreneur, management consultant, corporate lawyer and investment banker to the Board.

The Crawford’s initially became attracted to the company due in part to an opportunity to capitalize on some hidden value that the legacy management team had not been effectively exploiting.

• Pursue an acquisition strategy, using the tax advantages of the NOL’s totaling $3.3 million and $2 million research and development credit carryforward.

• In July 2016, brought a lingering legal settlement related to the BP oil spill to the finish line, which resulted in the receipt of $2,270,567 (after legal fees)

During the fourth quarter 2016, the Company was awarded a favorable settlement in the amount of $2,270,567 (after legal fees) for claims against BP Exploration & Product, Inc. for damages arising out of the BP Deepwater Horizon Oil Disaster.

• Collect on an intellectual property law suit

In December 2016, the Company settled a suit against Opus Inspection, Inc., formerly Systech International, LLC, (“Opus”) that was originally filed in 2007 with respect to infringement on two of the Company’s emission product patents. The settlement requires Opus to purchase at least $3.9 million of the Company’s products over a 27-month period from the date of settlement at a premium over regular prices, deposit an advance of $1.3 million which will be applied to purchase orders over the next 27-months, and make an additional payment to the Company in the amount of $50,000.

Finally, management seems investor friendly. For example, the company did not embark on excessive dilution to complete recent acquisitions.

2. The company fits our “boring can be beautiful” theme that we often talk about

As we stated in our original EML “Reasons for Tracking” article (See our Eastern Company (The) (NASDAQ:EML) article for more details on this), buying shares of stock in boring yet established companies that have been around for years on the verge of reinventing their operations is one of our favorite things to do. We stated that Peter Lynch was big fan of this tactic:

• The name is boring, the product or service is in a boring area, the company does something disagreeable or depressing, or there are rumors of something bad about the company--Lynch likes these kinds of firms because their ugly duckling nature tends to be reflected in the share price, so good bargains often turn up.

• The fast-growing company is in a no-growth industry--Growth industries attract too much interest from investors (leading to high prices) and competitors.

It does not get more boring than HICKA.  HICKA was founded 25 years ago. After its acquisitions, the company now operates under an umbrella of three divisions:

Test and Measurement (Legacy):

This segment consists of diagnostic tools and equipment sold to the automotive industry and indicators and gauges sold primarily to companies in the aircraft and locomotive industries. These products are sold to original equipment manufacturers and to the aftermarket using a variety of distribution methods.

Industrial Hose:

This segment consists primarily of flexible metal and silicone hose products designed and manufactured or distributed primarily to the trucking industry and other industrial end-users. These products are sold to original equipment manufacturers and to the aftermarket using a variety of distribution methods.

Air:

Manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions

We are curious if the legacy business will benefit from the positive growth trends in autonomous and IoT industries, something we are looking into.

3. Acquisitions Taking Hold

As we stated before, the acquisition of Air Enterprises was a transformational acquisition and a reason HICKA jumped on our radar. The acquisition adds more than $30 million in annual revenue to HICKA and will be immediately accretive to earnings.  Prior to the acquisition, HICKA had a revenue run rate of around ~$10 million (including the Flexible Hose acquisition).

Detailed financials have not been released yet, but it seems as if HICKA made quite a good deal with a purchase price of $10.25 million. This is also underlined by the fact that JP Morgan Chase Bank supports the acquisition with a very favorable credit line of roughly $8m at LIBOR 0 and $2m at LIBOR 2%. We seldom see microcap companies receiving debt financing terms as favorable as this.

The company is required to release Air Enterprises financials by mid-September (71 days from June 1st).

Strong Q3 Confirms Acquisition Strength

Yesterday we made the following statement:

On August 9, 2017 HICKA announced Q3 2017 results that show how profitable the company now is and also confirmed the details that were provided in the press release detailing the acquisition of Air Enterprises.

• Q3 sales of $7.2 million vs $1.5 million in the prior year

• EPS of $0.31 vs $0.00 in the prior year

After a closer look at the numbers, we realized this statement is not entirely incorrect. Air was acquired on June 1, 2017, so the third quarter only includes one month of its revenue, which we estimate to be at least $2.5 million. This means that most of the sales gains may have come from the legacy (test & measurement) division and the flexible hose division purchased in July of 2016, unless Air is really “taking off.”  From our due diligence, we learned that Air was not really a focus of its previous parent.

We expect that the Q3 SEC filings will detail where the increase in revenue came from.  Here is what we do know: taking a look at Federal Hose’s revenue, starting from when it began contributing to revenue, since it was acquired, reveals the following:

• Q4 2016 - $1.7M

• Q1 2017 - $1.5M

• Q2 2017 - $1.6M

• Q3 2017 -  TBD

The legacy business has normally run at a quarterly revenue run-rate between $1.0 to $2.0 million. If these trends hold, it can be surmised that, on the high end, the revenue from Legacy and Industrial Hose was about $4.0 million and Air came in at around $3 million.  This would imply a quarterly revenue run-rate of for Air of about $9.0 million ($36 million, annually).

Here is a look at pre-tax margins trends:

• Q4 2016 – Negative

• Q1 2017 -  Negative

• Q2 2017 – 6.6%

• Q3 2017 - 13.5%

Whatever the case, it appears that HICKA is finally firing on all cylinders and that Q3 is only a glimpse of the earnings power of the new company. If these margins hold, HICKA’s quarterly EPS run-rate could be as much as $0.55.

4. Room to Expand the Air Enterprises Acquisition

Now that Air is not buried in the coffers of its previous parent, HICKA can bring focus that was missing to the segment. Expansion opportunities include geographic, industry wide and through getting more revenue from its current customer base by expanding relationships within the divisions of its customers.  Also, customers of the company's legacy business may be a perfect fit to cross market Air Services to.

5. Moat

Value investors and microcap investors talk about “moats”. A “moat” refers to characteristics that give companies unique competitive advantages and recurring customers.  It appears that Air has some moat-like qualities defined by the customized solutions it offers its customers that need better quality standards than competitors can offer. Air’s customers tend to operate in rugged and “sanitary risk” environments. Each customer the company deals with has very specific and different sets of needs. These customers can't get what they need from cookie cutter providers. This allows the company not to compete as much on price, so it can extract extra margin and also results in a recurring customer. Furthermore, these systems that the company develops for its customers have to be replaced every several years. This makes the segment somewhat of an annuity.

6. Continued acquisition strategy

We think the company is going to be very aggressive in making accretive acquisitions. Looking at management’s history, they have a successful combined track record of completing accretive acquisitions.  As we mentioned before, board member Edward Crawford founded PKOH in 1992, taking the company from ~$94 million in revenues and creating a billion dollar company.  Acquisitions were a large part of the strategy.  With a credit line from JP Morgan and being solidly profitable, HICKA’s “acquisition war chest” should be ready to be deployed.

Valuation

We see a favorable valuation assuming run rate can continue.

Using Q3 2017 EPS of $0.31 as run rate would equate to $1.24 EPS. Applying a very conservative P/E of 10 would equate to a near term price target of $12.40. However, as we stated, the run-rate EPS could be as high as $0.50 per quarter. Ultimately, we think HICKA has the makings of a classic ignored multi-bagger.

Our conservative run rate estimate for annual revenue is $45 million, with the newly acquired Air Enterprises business contributing $30-$35 and the legacy businesses contributing about $10 million. At 14%, the pretax margin in the last quarter was obviously better than previous quarters, which gives a strong indication that the Air Enterprises business can actually boost margins even more in the future. Remember that only one month of Air Enterprise operations is in the 3Q 2017 earnings.

With a 14% pretax margin, and 35% tax rate, HICKA would produce roughly $0.35 in quarterly EPS. This ignores the company’s deferred tax asset of $3.8 million. With the tax asset, this translates to roughly $0.55 EPS per quarter. Once Air Enterprises’ financials are fully reflected in its financials, we estimate a pretax margin of up to 23%, maybe even higher, which also translates to roughly $0.55 per share.

Once the company has released detailed financials with more segmented information, we will be able to conduct our sum-of-the-parts analysis and give even better estimates.

Other Positives:

• High insider ownership (roughly 70%)

• Low outstanding share count (roughly 3 million)

Caveats

• Highly illiquid stock

• Little to no commentary from management in press releases