Name: ALDILA Inc. (NASDAQ:ALDA)
Web Site: http://www.aldila.com
Brief Description: Aldila, Inc., through its subsidiaries, engages in the design and manufacture of graphite (carbon fiber-based composite) golf shafts in the United States. It sells its shafts to golf club manufacturers, distributors, and golf pro and repair shops. The company also develops cosmetic designs for customer’s golf clubs, and sells composite prepregs and hockey sticks. Aldila, Inc. was founded in 1972 and is based in Poway, California.

ANALYST OPINION: We believe ALDILA Inc. (NASDAQ:ALDA) is undervalued. For the last several of years, ALDA has reported strong operating improvements including accelerated revenue growth followed by breakeven and a steady rise of net margin. 

VALUATION: Based on P/E, EV/EBITDA and P/S valuation we have derived a fair value of $40 per share of ALDA (55% above current price).

OUR ESTIMATES:

year end - Dec 31	Revenue	EPS, diluted
Q4FY05	$19.9 Mn	$0.64
FY05	$78.8 Mn	$2.56
FY06	$110.2 Mn	$3.50

HIGHLIGHTS:

Accelerating revenue growth due to the introduction of co-branded shafts and continued success in the branded segment. ALDA reported strong revenue growth for FY04 (+40% yoy), 9moFY05 (+46% yoy) and Q3FY05 (+79% yoy). The introduction of co-branded shafts and continued success in the branded segment have fueled unit sales while also increasing the average selling prices (ASP). The ASP of shafts sold increased for FY04 by 22% yoy, for 9moFY05 - by 32% yoy and for Q3FY05 by 22% yoy.

Steady improvement in gross margins due to the favorable changes in the revenue mix and economies of scale.
Gross profit margin increased by 15 percentage points in 2004 vs. 2003 and by 3 percentage points in 9moFY05 vs. 9moFY04. ALDA explained this improvement by favorable changes in the product mix and, to a lesser extent, by economies of scale.

Strong growth in operating margin fueled both by higher gross margin and limited growth of SG&A expenses.
ALDA’s operating margin jumped by almost 18 percentage points in FY04 vs. FY03 and by 7 percentage points in 9moFY05 vs. 9moFY04. In addition to gross margin improvement, ALDA’s profitability was also boosted up by continuous reduction of SG&A expenses as % of sales. ALDA reported a reduction of 3 percentage points in SG&A expenses as % of sales for FY04 vs. FY03 and a 4 percentage point reduction in 9moFY05 vs. 9moFY04.

Solid bottom line boosting cash flows.
Strong net income in both FY04 and 9moFY05 helped ALDA record increasing cash flows, which ultimately raised cash balance to $19.4Mn, or nearly 40% of total assets while keeping zero debt.

Potential acquisition target for major industry players.
Strong brands, excellent operating performance and high cash balance makes ALDA a potential acquisition target for major players in the golf equipment industry.

Number one shaft brand.
Darrell Survey Company, a leading provider of independent reports on golf equipment usage, recognized ALDA as the number one shaft brand in a recently completed U.S. National Survey.

Golf equipment industry is currently witnessing a recovery after a strong decline in 2002.
After an 8% year-over-year drop in manufacturers' sales of golf equipment in 2002, the industry is recovering with estimated annual growth of 3% for both 2004 and 2005. Golf equipment sales are expected to reach $2.56 billion in 2005 in wholesale prices. (Sales of Sporting Goods: On the Upswing; January 2005, SGMA)

Main risks.
We consider customer concentration and high product specialization to be the main risks related to ALDA. ALDA’s top five customers accounted for 57% of sales in 2004 (although much lower than in the previous 2 years, when more than 70% of sales went directed to top 5 customers). Thus, ALDA’s results are highly dependent on continued willingness of main customers to purchase shafts from ALDA as well as their success in selling clubs containing ALDA’s shafts.