When it comes to electronic and electrical power supply components, Espey Mfg. & Electronics (NYSE:ESP) stands out as a vertically integrated powerhouse. From transformers and radar equipment to power supplies for the Navy, Espey is a trusted supplier with a massive pre-funded backlog. Their products are essential for Navy vessels operating in harsh and wet conditions, as well as for the rail, military aircraft, and off-road industrial vehicle markets.

Espey’s reputation for rugged and reliable design extends to commercial applications, such as keeping trains running smoothly on high-vibration routes. They also provide power converters and transformers to major military aircraft platforms supplied by industry giants like Raytheon, Lockheed Martin, Boeing, Northrop Grumman, and General Dynamics. With an impressive track record and a wide range of customers, Espey has positioned itself as a key player in critical industries.

So, what makes Espey a compelling investment opportunity? Let’s explore the catalysts driving their growth and the potential risks investors should consider.

Investment Thesis: Safeguarding National Defense and Beyond

Espey’s close relationship with the Navy highlights the trusted role they play in ensuring mission-critical electrical power supply. From destroyer and submarine platforms to the Navy’s future DDG-X destroyer, Espey’s products are vital for radar systems, weapon operations, and more. The Navy’s recent commitment to Espey, combined with their vertical integration and proven track record, make them highly likely candidates for future Navy contracts.

Espey’s expertise extends beyond defense, with a strong presence in the commercial rail market. Their power systems enable reliable long-haul rail travel in high-vibration environments, proving essential for customer satisfaction and cost-effective maintenance. The trust and reliance built over the years lock in customers and create high switching costs, which further solidifies Espey’s market position.

While military-driven cyclicality can pose challenges, Espey has successfully diversified its customer base and secured non-Navy contracts. This strategic move has resulted in a three-year streak of winning new orders, averaging $40 million annually. Their ability to secure platform designs outside the Navy and rail markets opens up new growth opportunities and reduces dependence on military budgets.

Catalysts: High Backlog, Strong Leadership, and Dividend Potential

Under the leadership of CEO David O’Neil, Espey has experienced remarkable growth. O’Neil’s compensation structure aligns with the company’s success, focusing on sales and backlog increases, as well as operating earnings. With the current all-time high backlog and promising operating income growth, O’Neil’s leadership indicates a favorable outlook for shareholders.

The funded portion of Espey’s $83.6 million backlog stands at $83.5 million, and they expect to fulfill a minimum of $39.5 million this fiscal year alone. These numbers exclude additional build-to-print or short lead time sales, offering potential for even more revenue growth. Espey’s ability to attract substantial new orders is crucial for their long-term growth, and they have demonstrated their capability to do so.

Investors should also consider Espey’s dividend history and potential for future increases. Prior to the pandemic, Espey consistently paid a quarterly dividend of $0.25, sometimes supplemented by a special dividend of $1.25. The reinstatement of the regular quarterly dividend and its subsequent increase to $0.15 per share reflects the company’s financial strength. As Espey continues to grow and generate strong cash flow, further dividend increases could positively impact the share price and yield.