DMC - The Alternative Energy Company?

Originally, I intended on taking some time today to write about American Science & Engineering’s (“AS&E” Ticker Symbol: ASEI) fourth quarter earning release, conference call, share buyback plan, and dividend announcement. In light of Dynamic Material Corporation’s (“DMC” Ticker Symbol: BOOM) contract announcement this morning, I decided to write about this contract and its broader implications.

Today, DMC announced that it received an $8.3 million contract for explosion clad metal plates from a U.S. based customer. The customer will utilize the plates in specialized equipment for the alternative energy sector. The significance of this contract lies not only in the size of the contract but also in the type of contract. This contract represents the first contract known to investors for some form of alternative energy application. In the last few years, DMC has announced large contracts for several nickel hydrometallurgy projects, a couple refinery projects, a natural gas project, a petrochemical project, and now an alternative energy application. With this contract, it is clear that DMC’s opportunities are continuously expanding.

Here is the main quote from Yvon Cariou, CEO:

"The opportunities in the energy sector clearly extend beyond the conventional oil and gas industry. We believe the traditional and alternative energy markets both present significant long-term prospects for DMC."

Not Ethanol

I talked with Geoff High, from Pfieffer High Investor Relations, and all he could tell me regarding the contract was that it was NOT for an ethanol project. If anyone wants to speculate as to what type of alternative energy application we might be looking at with this contract, feel free to post your comments.

Guidance and Earnings

Anyone that listened to the last earnings call or read my blog post analyzing the fourth quarter earnings report was likely expecting a contract announcement in the near future. Here is what I wrote on my blog following the last earnings report and conference call:

“While there were no large orders announced in the first quarter, both the CFO and CEO indicated that they were quoting a number of large projects and they were “reasonably confident” they would be reporting on a large order “soon”. Depending on the timing of that order and other factors relating to the order, revenues from that order may or may not be included in 2007. Nonetheless, DMC will be completing shipment on Ambatovy in Q2 and commencing shipments on the natural gas contract in Q3. If management is able to book the large order noted above sometime in the second quarter with the expectation of shipping at least a portion of that order sometime in the fourth quarter, managements’ guidance for 20% revenue growth will be out the window. Please keep in mind that there are no guarantees that DMC will get this order or that DMC will be able to ship at least portions of this order by the end of the year.”

As mentioned in the press release, the order will ship in the fourth quarter of 2007. With this contract, DMC will be shipping on large announced contracts in Q2, Q3 and Q4. Given the timing of the shipment on this contract, I am further convinced that management guidance for 2007 is too conservative and I stand by my original projection of 30-35% top-line growth for 2007 (see bottom of this post).

Supply Chain

The timeframe between when management announces a contract and when a contract actually ships varies depending on a number of factors including the availability of raw materials. The fact that DMC plans to ship this large order before the end of 2007 is a positive indicator that there has, at the very least, not been any further deterioration in the supply chain. In my opinion, the timing reflects managements’ contention that there will be continued improvement in the supply chain throughout the course of the year.

Conclusion

Today’s contract announcement was largely expected by DMC investors. Nonetheless, the type of contract took me by surprise and has larger implications in that the type of contract indicates that DMC is expanding its customer base. As management expects to ship on the contract in the fourth quarter of 2007, management expectations for 20% top-line growth in 2007 appears increasingly conservative. Finally, management indicated on the last conference call that there were a number of large projects on the “hot list”. I expect the timing between orders to compress as we move into the future. At the same time, don’t forget the rapid pace that DMC is booking smaller contracts.

Regards,
Tuff

Dynamic Materials Corporation (Public, NASDAQ:BOOM)