Small Cap. Research Report / Buy Recommendation
1st Updated Report
November 1st , 2012

Probe Manufacturing, Inc.

Opinion & Recommendation: 
Sterling Investment Services is reiterating its Buy Recommendation on the shares of Probe Manufacturing, Inc., an 18 year old company that provides full service design and manufacturing services to electronic equipment manufactures. 

We initiated coverage on Probe Manufacturing (“PMFI”) on August 9, 2011, with the price of Probe’s common stock at $0.0061 per share.  A copy of that report may be found on our web site at www.sterlinginvestments.com/research/pmfi/pmfi08-09-11.htm. We then updated our coverage with a “Buy Rating” on September 27th, 2011, with the price of Probe’s common stock at $0.0062 per share.  A coy of that report may be found on our web site at:  http://www.sterlinginvestments.com/research/pmfi/pmfi09-27-11.htm  Since then the company has shown a considerable amount of growth in its sales and earnings.  PMFI has seen an approximately 33% increase in the price of common stock as the price has risen from $0.0062 to approximately $0.0083 per share.    

We are considering the shares of Probe Manufacturing to be suitable at the current price levels to the addition of portfolios as a speculative component; and as a result we are placing a speculative buy recommendation on the shares of Probe Manufacturing. 

Company Description: 
Probe Manufacturing provides a range of engineering, manufacturing and business services to companies who design and market electronic products, Original Equipment Manufacturers (OEM). The company’s revenue is generated from sales of services primarily to customers in the medical device, aerospace, automotive, industrial and instrumentation product industries. The services the company provides are commonly referred to as Electronics Manufacturing Services (EMS).  Their offerings include new product introduction, collaborative design, procurement and materials management, product manufacturing, product warranty repair, and end-of-life support.

Products and Services: 
The company’s primary products and services are:

Engineering.Probe offers computer assisted engineering, design, and engineering for manufacturability, circuit board layout and test development. The company also coordinates industrial design and tooling for product manufacturing.

Supply Chain Management.Supply chain management consists of the planning, purchasing, expediting and warehousing of components and materials.

Assembly and Manufacturing.The company’s manufacturing operations include printed circuit board assembly, sub-system assembly, box build and system integration, the process of integrating sub-systems and downloading software before producing a fully configured product.

Testing. The company offer’s computer-aided, in-circuit testing of assembled printed circuit boards, which contributes significantly to its ability to deliver high-quality products on a consistent basis. The company’s test capabilities include manufacturing defect analysis, in-circuit tests to test the circuitry of the board, and functional tests to confirm that the board or assembly operates in accordance with its final design and manufacturing specifications

Final System Assembly and Test.The company assembles systems to a specific customer order and builds to standard configurations. The complex, finished products produced typically require extensive test protocols. The company’s test services include in-circuit testing, functional and environmental tests.

Distribution. Probe Manufacturing offers our customers flexible, just-in-time delivery programs allowing product shipments to be closely coordinated with customers' inventory and consumption requirements. The company has the ability to ship products directly into customers' distribution channels or directly to the end-user.

Recent Developments:
On August 30th, 2012 Probe Manufacturing presented at the Southern California Investors Conference at the Marriott Hotel in Newport Beach, California. (1)

On August 14th, 2012 Probe Manufacturing filed its 2nd quarter report, a form 10-Q, with the Securities Exchange Commission (SEC).  In reviewing the 10-Q Probe reported impressive sales gains for the six months ended June 30th, 2012.  Sales in the 6 month period were $2,889,153 compared to $2,070,625 in the year ago period.  This is an increase of approximately $818,528 or approximately 40%.  (2)

Income from operations totaled $181,542 for the six months ended June 30th, 2012 compared to $100,793 for the six months ended June 30th, 2011, an increase of approximately $80,749 or approximately 79%. 

On April 9th, 2012 Probe Manufacturing filed its annual report for the year ended December 31st, 2011, a Form 10-K, with the Securities Exchange Commission (SEC).  In reviewing the 10-K Probe reported impressive sales and income gains for the year.  Sales for the year increased to $4,549,798 compared to $2,799,935 in the prior year.  This is an increase of approximately $1,759,863 or approximately 63%.  Operating Income for the year increased to $228,720 compared to $67,819 in the prior year, which is an increase of $160,901 or approximately 237%. (3)

Management:
The senior management of the company is comprised of the following individuals:

Kambiz Mahdi:  Chief Executive Officer, Director.  Mr. Mahdi is the co-founder and a member of the Board of Directors of the company. Mr. Mahdi was the Technical Sales Manager for six years with Future Electronics, a billion dollar electronics distributor. While at Future Electronics, Mr. Mahdi developed technical management leadership and management tools for their highest technology customers and applications. Mr. Mahdi has a BS degree in Electrical Engineering.

John Benett:  Chief Financial Officer. Mr. Benett has been with the company for 4 years. Mr. Bennett joined the company as the controller and was promoted to the Chief financial officer in 2007. Mr. Bennett was formerly with Aim Technologies, Inc. for 8 years as the Chief financial officer and previously with Electritek, Inc for 10 years as the Chief financial officer. Mr. Bennett has a Bachelors of Science in accounting from Mesa College and a Masters of Science in Finance from University of Colorado.

Shervin Talieh: Director.  Mr.  Talieh has over 17 years of hands-on experience building and growing organizations that provide solutions to clients in various sectors.  Mr. Talieh started his career by successfully building, growing and selling his consulting startup, Index Data. Most recently, Mr. Talieh is the founder and CEO of Drumbi, an Internet technology startup focused on data and voice synchronization. At Drumbi, he guides the company's strategy, fund-raising, and operations. Prior to Drumbi, Mr. Talieh served at Vice President, Business Development for Goldeneye Solutions, a SaaS

Robert Young: Director:  Prior to joining the company’s board of directors, Mr. Young was Director of Mobile Services for Boeing Satellite Systems,  Inc. (“BSS”), the world’s largest manufacturer of commercial satellites, where he was responsible for developing communication and navigation services for governmental and commercial clients. Prior to joining BSS, Mr. Young was the CFO and Chief of Business Operations for a joint venture between Hughes Electronics, General Motors and Delco Electronics. Previously, Mr. Young was assigned to the Hughes Electronics Corporate Office where he was responsible for mergers and acquisitions, identifying and developing foreign offset programs and served as the Hughes Chief Economist. Mr. Young currently sits on the board of Kinecta Federal Credit Union, which is the 9th largest credit union in the United States (having previously served as Kinecta’s Chairman of the board of directors from 2007-2009). Mr. Young received his B.S. degree from the San Diego State University and an M.BA. from Loyola Marymount University.

Ralph Adams:  Special Advisor to the Board of Directors.  Mr. Adams is the owner of Capital Management Company.  He is currently the CEO of American Steel.  He has successfully completed 11 mergers and sold 12 companies for stockholders.

Financial Highlights:

Industry:
The EMS industry is large, competitive, diverse, and is serviced by many companies, including several that have achieved significant market share.  Historically, the EMS industry has experienced significant change and growth as an increasing number of companies elected to outsource some or all of their design, manufacturing, and distribution requirements.  We believe that growth in the EMS industry will be driven largely by the needs of OEMs to respond to rapidly changing markets and technologies and to reduce product costs. Additionally, we believe that there are significant opportunities for EMS providers to win additional business from OEMs in certain markets or industry segments that have yet to substantially utilize EMS providers.

Comparable Companies:

Our Analysis:
We feel that Probe Manufacturing, Inc. ‘PMFI’ presents an interesting opportunity.  Since the publication of our initial research report, they have reported positive 2nd Quarter results.  We feel the Company’s restructuring efforts are continuing to show results.  Our research continues to indicate that the EMS industry is expected to show solid growth for the foreseeable future.  We consider this to be a favorable environment for the company. 

We have endeavored to find what we believe are reasonable comparable companies to Probe Manufacturing.  Our research leads us to believe that the companies above are reflective of the overall electronics manufacturing services industry.  If the shares of Probe Manufacturing were to trade at comparable valuation ratios as those of the comparable companies listed above, then it would not be unrealistic to expect a reasonable amount of price appreciation from the current price levels of Probe’s common stock. 

The shares of Probe Manufacturing are currently traded on the Pink Sheets QB portion of the Over The Counter (OTC) market.  The company is fully reporting with the Securities Exchange Commission, and has had 11 consecutive profitable quarters.  It is our opinion that the company currently qualifies to upgrade its listing to the Bulletin Board on the Over the Counter market.  Successfully doing so could improve the liquidity in the company’s shares and its overall valuation. 

We are considering the shares of Probe Manufacturing to be suitable at the current price levels to the addition of portfolios as a speculative component; and as a result we are willing to place a speculative buy recommendation on the shares of Probe Manufacturing. 

Endnotes: 
1.             Yahoo Finance.  Probe Manufacturing Press Release dated August 28th, 2012.  http://finance.yahoo.com/news/probe-manufacturing-inc-present-southern-161900181.html

2.             Probe Manufacturing 10-Q for the quarter ended June 30th, 2012  filed with the SEC on August 14th, 2012.
http://www.sec.gov/Archives/edgar/data/1329606/000150441212000141/probeq22012_10q.htm

3.             Probe Manufacturing 10-K for the year ended December 31, 2011 filed with the SEC on April 9th, 2012  http://www.sec.gov/Archives/edgar/data/1329606/000150441212000032/probe10k2011_10k.htm

About Sterling Investment Services, Inc.:

Sterling Investment Services is an independent “buy side” research firm.  The primary focus of Sterling Investment Services is on “technical analysis” of the U.S. stock market and individual stocks.  Sterling Investment Services publishes a daily Market Commentary Blog which focuses on “technical analysis” of the major market indices, the various sector indices we track, as well as any other item that catches our interest.  Sterling Investment Services also publishes the Sterling Weekly, a free weekly newsletter that comments on issues facing the market and the economy.  The Sterling Weekly also includes a calendar of the week’s upcoming economic releases and corporate earnings announcements.  Sterling Investments also publishes news on a variety of financial and market topics on our website.  Topics covered include bonds, gold and precious metals, hedge funds, Initial Public Offerings (IPO), Master Limited Partnerships, OTC Markets, Private Equity, Private Placements, SEC News, and Venture Capital.  Sterling Investment Services occasionally publishes research on Small Cap stocks.  Our small cap research is primarily based upon fundamental research on the companies covered in our reports and Small Cap Review.

Disclaimer: The Sterling Investments series of newsletters is produced by Sterling Investment Services, Inc. (www.sterlinginvestments.com)  All information used in the production of this  report has been obtained from sources believed to be reliable and accurate.  Sterling Investment Services does not warrant or assume any liability for inaccuracy of the information used to produce our publications.  To receive further information on these services please visit our web page at: www.sterlinginvestments.com  If you would like to contact us our fax # is (404)-816-8830. Email address is: enelson@sterlinginvestments.com   Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.  Sterling Investment Services, Inc. has not been paid any fee for  the production of this report.  However in the future,  Sterling Investment Services may charge fees for the production of follow up reports or services.