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LSI Industries Is Back With Another Killer Result For Q2. Is There Upside Risk To The Dividend This Year?

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A small-cap stock defying broader market trends could be a hidden gem for 2023

Lighting and display small cap stock LSI Industries (NASDAQ:LYTS) rallied 14.8% higher on Thursday after reporting a solid second quarter and proving momentum is continuing even with a backdrop of macroeconomic headwinds.

LSI Industries’ Earnings

The latest rally yesterday has pushed the LYTS stock’s 52 week gain to 111.88% with the stock on track to breach all time highs on the current trajectory.

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LSI Industries grew net sales by 16% over the year to $128.8 million from $111.1 million in the same quarter of 2021. Analysts in the market were expecting a milder growth outcome forecasting a figure of around $118 million.

The firm's underlying profits measured by adjusted EBITDA grew by 54% to $13.0 million and beat analyst forecasts expecting a figure of around $10 million.

The company generated $8.9 million in free cash flow, bringing the first half total to $19.0 million. 

Net income grew by the largest amount of 107% to $6.4 million. On an adjusted basis, the company generated $7.6 million of net income or earnings per share of 26 cents. The adjusted EPS figure was well ahead of consensus forecasts of around 18 cents.

LYTS CEO James Clark told investors “Demand levels in key vertical markets remain favorable, our backlog is healthy, customers increasingly recognize the value of our solutions, manufacturing and supply chain execution remain on-point, and positive cash flow and debt reduction are expected to continue”

The firm has utilised excess free cash flows to repay debt with more than $25 million reduced over the last year. LYTS ended the quarter with a net leverage ratio of 1.3x.

As debt continues to fall, this could pave the way for future dividend increases as free cash flows rise.

Clark was positive on the outlook from the company, concluding with a statement saying “despite ongoing pressures on the general economy, we remain optimistic about the second half of the fiscal year and the long-term prospects of our markets”

The chart below taken from Fintel’s financial metrics and ratios page highlight that even though the share price has strengthened significantly this year, earnings continue to grow at a faster pace. This is explained by a rising EBIT/EV valuation.

LSI Industries

Analyst George Gianarikas from Canaccord Genuity Capital Markets increased his ‘buy’ rating target price for the stock from $12 to $16 on the back of the result. Gianarikas highlighted management's ability to gain additional market share in an industry that could be shrinking as a result of the weakening economy. 

F intel’s consensus forecast of $14.54 suggests the stock has reached analysts medium-term target prices. The average target has increased from $13 at the beginning of December to $14.54 ahead of the result and will likely be raised higher as analysts update models and forecasts.

 

Looking ahead, Fintel’s forward estimate forecasts suggest analysts expect growth to continue over 2023-2025 at a faster trajectory.

LSI Industries

Research from the Fintel platform also revealed the company has been experiencing above average levels of institutional buying activity. This is explained by a bullish Fintel Fund Sentiment score of 78.15.

This score ranks LYTS in the top 7.5% out of 36,416 global screened securities. LYTS currently has 159 institutions on the register that collectively own 21.2 million shares of the float.

The largest shareholders include: Systematic Financial Management, Dimensional Fund Advisors, Vanguard Group Inc, WealthTrust Axiom LLC, Royce & Associates Lp, Archon Capital Management LLC, Renaissance Technologies Llc, Kennedy Capital Management, Inc and BlackRock Inc.

Article by Ben Ward, Fintel