Does Cubic Have 25% Upside?

Credit Suisse has upgraded its official rating to Outperform from Neutral, and the price target was set at $52.00. That implies almost 25% upside from Wednesday’s $42.02 closing bell price. Cubic often gets overlooked in the defense and transportation support segment because its $1.1 billion market cap is smaller than many peers. That being said, a quick balance sheet review shows that it has a very conservative and deleveraged balance sheet. After a couple years of no real growth, the consensus estimates are for growth to resume next year.

Credit Suisse has said that the stock has performed poorly year to date and the firm now believes that Cubic’s share price now fully embeds the legacy and known issues that have been holding the stock down. They also feel the price now does not capture Cubic’s superior earnings growth prospects.

One great boost here is that the backlog offers visibility into superior organic growth prospects for 2016. Its backlog is about $3 billion. With an uncertain macro environment, Credit Suisse thinks this offers much higher visibility into the company’s 2016 top-line than is enjoyed by other companies.

Thursday’s report signaled that margins are at trough, expenses should help should drive expansion and segment EBIT margins are likely to reach about 5% this year, versus 9% to 10% over 2009 to 2012. Cubic’s underlying trends were also said to be much better than the headline data, and more action in the company cleaning up the portfolio is likely.

ALSO READ: 4 Small Cap Technology Stocks That Portfolio Managers Love

Credit Suisse sees the firm’s valuation looking cheap and at a discount to the peer index group, versus what had been a premium historically.

Cubic shares traded up 2% at $43.00 in early afternoon trading on Thursday. Its consensus analyst price target is $52.25 and the 52-week range is $39.86 to $55.73.