Commercial equipment manufacturer Astrotech Corporation (ASTC) operates in the aerospace and defense sector. The slump in the travel and aerospace industry has severely affected ASTC. The stock has declined 62.1% over the past year, and 32.8% year-to-date.

Airports are currently struggling to stay afloat amid depressed air traffic and huge overhead costs. As a result, most airports are likely to postpone capital investments to buy or upgrade their existing non-current assets. The potential fourth wave of coronavirus has exacerbated the situation, causing shares of ASTC to slump 46.4% over the past month.

Here’s what we think could shape ASTC’s performance in the near term:

Depressed Demand

Austin, Tex.-based ASTC, which manufactures explosive and narcotics trace detectors that are used primarily in airports and secured facilities, has been witnessing a slump in demand given lower air traffic. Because domestic and international travel remains low amid a fourth COVID-19 infection wave, the demand for ASTC’s products is likely to remain depressed in 2021. Also, as international travel continues to be depressed amid surging coronavirus cases worldwide, the sales of ASTC’s flagship product TRACER 1000 sales might decline too.

Furthermore,  given that ASTC’s products used for explosives and narcotics detection are non-current assets, the demand and sales margins for them  are likely to remain low because  most airports already possess the required equipment. Also, as the United States moves toward the widespread decriminalization  of marijuana, the demand for its AgLAB-1000-D2 hemp and cannabis detector might decline  in the near future.

ASTC’s latest breath analyzer product, BreathTest-1000, is under development, and will require FDA approval for commercial use. In this regard, ASTC noted  in its latest quarterly earnings release that “Obtaining FDA approval is a complex and lengthy process, and there can be no assurance that FDA approval for BreathTest-1000 will be granted on a timely basis or at all.”

Weak Financials

Despite having a market capitalization of $35.57 million, ASTC’s trailing-12-month revenues came in at $552,000. The company generated $58,000 in gross profits last year, translating to a gross profit margin of 10.5%. However, ASTC’s trailing-12-month gross profit margin is 63.4% lower than the industry average 28.7%. Its trailing-12-month net income stood at negative $7.89 million, implying a negative return on sales, while its trailing-12-month EBITDA stood at negative $6.70 million. Also, the company’s trailing-12-month ROE, ROA and ROTC are negative.

ASTC is bleeding cash from its operations, as evidenced by  its negative cash flows. The company’s trailing-12-month net operating cash flow and levered free cash flow were negative $6.07 million and $2.92 million, respectively. With negative cash flows and operating profits, ASTC’s  creditworthiness is questionable . Its debt/free cash flow is negative. Without proper cash inflows to pay off $3.17 million in  outstanding, ASTC’s  debt and interest  burden is  immense.

Stretched Valuation

In terms of trailing-12-month EV/sales, ASTC is currently trading at 30.10x, significantly higher than the industry average  2.15x. The stock’s trailing-12-month price/sales multiple of 24.89 is 1,377.5% higher than the industry average  1.68.

POWR Ratings Reflect Bleak Outlook

ASTC has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ASTC has a D grade for Quality and Value, and F for Stability. Along with negative profitability and relative overvaluation, ASTC has a beta of negative 1.22, indicating an inverse relationship with the market movements. These justify ASTC’s grades.

Of the 66 stocks in the C-rated Air/Defense Services industry, ASTC is ranked #61. In addition to the grades we’ve highlighted, one  can check out ASTC Ratings for Momentum, Growth, and Sentiment here.

There are 17 stocks in the Air/Defense services industry with an overall rating of B. Click here to view them.

Bottom Line

ASTC’s beta indicates that the stock moves in the opposite direction to  current market trends. As the equity markets rally amid a faster-than-expected economic recovery, ASTC stock will likely  decline further. Thus, we think the stock is best avoided now.

ASTC shares were trading at $1.19 per share on Wednesday morning, down $0.00 (-0.42%). Year-to-date, ASTC has declined -32.77%, versus a 10.91% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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