Cubic Corp: Zacks’ Bear of the Day Play

Cubic Corp (CUBSnapshot Report) has been sailing through choppy waters for several years, and the newest hurdle the company is facing is the increased strength of the U.S. dollar, which has added pressure to the company’s income statement.  This net income problem was further exasperated by declines in Joint Readiness Training Center exercises in the fourth quarter 2015.  With the dollar improving against other major currencies, and the expected decline of further JRTC exercises, Cubic is facing several issues it does not have control over, and is therefore, the Zacks Bear of the Day.

This Zacks Rank #5 (Strong Sell) is the parent company of two major business segments: defense and transportation. The Cubic Defense Applications group is a world leader in realistic combat training systems, mission support services and defense electronics. Cubic Transportation Systems designs, manufactures and integrates automatic fare collection systems for public transit projects throughout the world. This includes rail, bus and parking lot systems. The company supplies contactless smart cards; magnetic stripe cards; device software; and transit hardware including gates, ticket machines and card readers. Cubic Defense Applications provides realistic live combat training systems for military forces as well as virtual training systems, constructive simulation support, force modernization, battle command training and education and engineering & technical support.

In their most recent quarter, Cubic saw year over year declines in Net income -39%, Operating income -12%, and Organic sales -2%.  Further, both the Cubic Transportation Systems, and Cubic Global Defense Services saw sales decrease.  Specifically, the Transportation segment saw revenues decline 15% YoY.

As you can see in the Price and Consensus graph below, consensus expectations are repeatedly declining year over year.

Further, as you can see in the comparative graph below, Cubic has been underperforming the S&P 500 for almost the entirety of 2015.

Decreasing Estimates

Estimates for Q1 16, Q2 16, FY 16, and FY 17 have all declined over the past 30 days; Q1 16 has fallen from $0.47 to $0.39, Q2 16 has dropped from $0.58 to $0.56, FY 16 has plummeted from $3.16 to $2.24, and FY 17 has declined from $3.88 to $3.58.

Bottom Line

Foreign currency rates, and a lower number of Joint Readiness Training Center (JRTC) exercises were the main culprits of decreased sales for both of their major segments.  With no indications that the dollar will weaken anytime soon, and the continued decline in JRTC exercises, the light at the end of the tunnel seems very far away. Further, management stated that net income was significantly impacted by the increase in effective tax rates, which also is not appearing to be declining anytime soon.  Therefore it is best to stay on the sidelines with this Zacks Ranked #5 company for the time being.

If you are inclined to invest in the Electronic Products/Misc segment, you would be best served to look into Gigoptix Inc. (GIGSnapshot Report), or Mistras Group (MGSnapshot Report), both of whom carry a Zacks Rank #1 (Strong Buy).
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