$25.41
$59.12
bear $25.41
base $38.63
bull $59.12
margin of safety $23.00
market price* $55.58
Espey Mfg. & Electronics designs and builds power supplies, transformers and power distribution equipment for military customers: shipboard transformers and power distribution panels, power systems for combat vehicles, and power systems for aircraft radar and missile platforms. Work is done under fixed-price contracts, mostly for defense prime contractors and the U.S. government, and a handful of customers dominate: five customers were 67% of fiscal 2026 sales (year ended June 30, 2026). What happened in fiscal 2026. Sales were $46.1 million (fiscal 2025: $44.0 million). Net income was $11.2 million, or $3.89 per diluted share, versus $8.1 million and $3.02. Gross margin rose to 35.3% from 28.9%. The company attributes the jump to higher volume and mix, above-average margins on completed milestone sales, and labor that cost less than originally budgeted; it also warns that new products will need heavier engineering spending that may compress margins in the near term. Backlog was $134.9 million at June 30, 2026 ($123.7 million funded, $11.2 million unfunded), down from $139.7 million a year earlier, with about $48 million scheduled to ship in fiscal 2027. New orders were $41.4 million, well below fiscal 2025's $86.4 million. The company has no borrowings (an unused $3 million credit line), $19.4 million of cash and $26.0 million of investment securities. Last year's report said fiscal 2026 earnings per share would fall below fiscal 2025; they rose about 29% instead, so we give little weight to management's own forecasts and rely on reported results. How we measured earnings. We start from operating cash flow and remove the swings caused by customer advances and inventory build, which are large here: operating cash flow was $21.0 million in fiscal 2025 but $5.7 million in fiscal 2026 even though profit rose. We then deduct stock compensation and the company's ESOP share contributions ($1.1 million in fiscal 2026) as real costs, and deduct only maintenance capital spending. Capital spending of $3.1 million in fiscal 2026 was largely reimbursed by $2.03 million from a $3.4 million Navy facility award (fiscal 2025: $3.26 million reimbursed on $4.37 million of spending; fiscal 2024: $4.23 million on $5.16 million), so we count spending net of those reimbursements; management expects no more than $500,000 of capital spending in fiscal 2027. Owner earnings per share for fiscal 2017 to 2026 were $0.51, $0.81, $1.12, $0.62, $0.39, $0.64, $1.49, $1.72, $2.70 and $3.66. Because the value of the cash pile is added separately below, we strip the after-tax interest and other non-operating income out of the earnings stream (about $0.47 per share in fiscal 2026, taxed at 21%) so it is not counted twice. On that basis the last three years were $1.48, $2.23 and $3.19 per share. The earnings level we use. We use the median of the last three years, $2.23 per share (about $6.4 million a year). Those years cover the period in which the new building was completed, Navy-funded upgrades were made and the large multi-year shipboard and vehicle awards were being delivered; earlier years describe a smaller business that earned $0.39 to $1.12 per share. We do not use fiscal 2026's $3.19: the company itself says part of the margin came from milestone completions and cheaper-than-budgeted labor, four strong quarters have not yet shown that 35% margins are the normal level for this mix, and fiscal 2026 gross margin was 6 points above fiscal 2025. Owner earnings per share grew 43% in fiscal 2026 ($3.19 versus $2.23 excluding interest); our base case assumes 0% growth in year 1 from the $2.23 level, which is below that trailing rate and about 30% below fiscal 2026 itself, for the reasons above. Cash. Customer advances ($31.0 million) look like a liability against the cash, but they have already been spent: inventory ($26.0 million) plus prepaid and other assets ($10.5 million) exceed them, so the $45.4 million of cash and securities is the company's own money. We count $40 million of it as excess in the base and bull cases ($13.93 per share) and $35 million in the bear case ($12.19 per share). With no debt, nothing is subtracted for borrowings in any case. Per-share figures use the 2.87 million diluted shares reported for fiscal 2026; the September 2026 cover page shows 3.04 million shares outstanding, which would lower every per-share value by about 5.5% if used instead. Base case: $38.63 per share. The business is worth about $24.70 per share, the company owes nothing to lenders, and the difference is the business value plus $13.93 of cash. The story: the $123.7 million of funded backlog, which is roughly 2.7 years of sales, keeps the business at about $2.23 per share for the next 10 years as new awards replace shipped ones at the pace the company has sustained (sales never fell below $22 million in the last decade and have grown from $27.5 million in fiscal 2016 to $46.1 million). After year 10, we credit only what the ten-year record demonstrates, about $0.89 per share a year (the ten-year median excluding interest), not today's level. No growth is credited beyond flat: the roughly $48 million scheduled for fiscal 2027 is only 4% above fiscal 2026, and the pipeline of opportunities, management's expectation that revenue will exceed fiscal 2026, new products and further margin gains are not yet secured, so they are left out. Bear case: $25.41 per share. The risks are named in the filings: five customers are 67% of sales (in the prior year's report, three customers were $95.2 million of a $139.7 million backlog), new orders fell to $41.4 million, fixed-price engineering contracts cost the company money in fiscal 2024 and $13 million of engineering programs sat in backlog at June 2025, the company warns of near-term margin compression, and $11.2 million of backlog is unfunded. In this case the backlog ships at fiscal 2023-2024 profitability ($1.40 per share for 3 years), replacement awards then earn only the ten-year median ($0.89) for years 4 to 10, and afterwards $0.57 (the fiscal 2020 level). The business is worth $13.22 per share, there is no debt, and $12.19 of cash brings the total to $25.41. Even here the cash makes up roughly half the value. Bull case: $59.12 per share. If the margins seen in every quarter of fiscal 2026 (gross margin 34% to 37%) hold on the $123.7 million funded backlog, owner earnings stay at about $3.32 per share (fiscal 2026's $3.19 lifted 4% for the $48 million already scheduled for fiscal 2027) for 10 years and then settle at $2.23. The business is worth $45.19 per share, there is no debt, and $13.93 of cash brings the total to $59.12. What we tested. We checked the earnings level against the company's own explanation of the fiscal 2026 margin, which points to non-repeating helpers and to margin compression ahead, and it supports anchoring below the latest year. We also checked whether the cash was really customers' money and found the advances are more than covered by inventory and prepaid assets. What would make this wrong: a loss of one of the five large customers or a funding cut to a program, another year of losses on fixed-price engineering work, or, on the other side, proof that 35% margins are permanent. Change since our last analysis. Our earlier estimates were $10.40 (bear), $27.00 (base) and $40.50 (bull). The new figures are higher mainly because we now value all cases on the same basis with a 6% rate rather than the 10% to 12% used before, we count $40 million of the $45.4 million cash and securities instead of about half of the cash, and fiscal 2026 is now complete. Offsetting that, our earnings level is not lifted to the fiscal 2026 peak, and we deduct ESOP contributions as a cost. What we could not fully verify. The full text of the fiscal 2026 annual report was not available to us; fiscal 2026 figures come from the company's reported financial data and its earnings release and filing summary, while the customer-concentration and backlog detail in the bear case for June 2025 comes from the fiscal 2025 annual report. The itemized working-capital lines add up to within $0.4 million of the cash-flow-based figure in every year, and the small differences come from minor unlisted lines. The margin-of-safety price is about $23, roughly 40% under the base case and below the bear case, because of heavy customer concentration, lumpy fixed-price contracts, margins at a record, and a small, less liquid stock.