Post edited 12:11 pm – January 18, 2012 by Jae Jun
IEC Electronics is a provider of electronic manufacturing services (EMS) to technology companies. The Company specializes in the custom manufacture of circuit cards, system level assemblies, a range of custom cable and wire harness assemblies, and precision sheet metal.
Why is it Cheap? / Is it Cheap?
- Nothing jumped out at me.
- The only thing that I can say is that the market isn't expecting much growth out of the company.
Management
- Insider ownership at 16.59%
- CEO is also chairman of the board
- Acquisitions were financed with very cheap debt. Interest rates of 2.5 – 4%. 99% of the cost was done through financing. Smart.
- Huge increase in salaries for insiders 2011 vs 2010. CEO ompensation increased 75%. Performance targets were met but a lot had to do with acquisitions.
- Management does not buy back shares or buy their own stock even at low prices.
Growth
- In a highly fragmented and must grow through acquisitions.
- Bigger competitors are not giants such as KO or CAT and IEC does business in several segments so growth potential is there, but it has to be done through acquisitions.
Strategic Advantage/Moat
- Company strategy is to focus on creating manufacturing partnerships with new and old OEM's. This allows IEC to have a broader product line without a need to buy out every company.
- Basically, their strategy is to have really good relations with customers, help them save money, and make it difficult for the customer to switch to another company because the service is so good.
- With their manufacturing partnerships, IEC even ends up making all the products for some customers even though the products may be diverse.
- Better to be a low cost producer in this industry, but they are not.
Competitors
- Lots of competitors, big and small, therefore it is important for IEC to nail down strong manufacturers as partners.
- Good thing they target companies that cannot buy products from international suppliers due to regulation.
Risks
- Does not hold too much inventory.
- Has to purchase raw materials up front or receive them from customers. Uses turnkey services which could be a problem is the supplier does not have the required parts. Also it means IEC has to purchase small quantities regularly which is more expensive than buying in bulk.
- Obtained 53% of materials from two suppliers. If relationship broke down with any one of the two, it would cause big delays and losses.
- Concentrated customers. In 2011, Sigma represented 16% of revenue. GE represented 10% o revenue. Top 5 customers make up 45% of revenue.
- 56% of revenue come fro military and aerospace. How will reductions in military and aerospace budget affect IEC?
- Highly subject to economic conditions
- Customers do not commit to long term production schedules. They could cancel, delya or change orders any time.
Valuation
- Has turned the business around from 2005. Margins have dramitcally increased compared to early 2000's.
- Share dilution seems to be an issue. Increases by about 5% anually.
- Cheap on a P/S basis. P/B and P/TangibleBook is average.
- Acquisitions have added to FCF. Not entirely reliable in this case.
- ROE has been excellent, but the use of debt has been helping. ROE since 2005 has been 23% average.
- Compare with CROIC which is 17% during same period. Still high but the number has dropped to 8.3% in 2011.
- Solvency is an issue if they lose just one major account.
- Inventory turn has decreased from 2010 to 2011. This only confirms that the top line growth was from acquisitions.
- Long term debt has increased due to the acquisitions, but with such low interest rates, it wouldn't be a problem.
- Has an extraordinarily high accrual buildup. Accounting isn't very good. Red flag.
- Reverse DCF shows market is expecting about 5.5% growth with 12% discount rate.
- Using reverse Graham with EPS of $0.68, expected growth is 1%. Sounds ridiculous.
Catalysts
- Government defense budget is not decreased
- USA gets involved in another war
- Acquisitions do well
- IEC partners with several more suppliers to stabilize its distribution channel
- Diversifies customer base without losing sales
Other Pieces of Info
- Was created through a merger in 1990
- Founded in 1966
- Acquisitions in each of the past 3 years
- 33% higher backlog in 2011 vs 2010
- Acknowledges that employees are biggest assets
- Good relations with employees. No work stoppages, no unions. Only 1 review on glassdoor.com but it's a good one.
- Certain
covenants in IEC's credit agreement with Manufacturers and Traders
Trust Company restrict the Company from paying cash dividends.
Verdict
- Management: B+
- Growth: B-
- Moat: C
- Risk: C
- Valuation: B+
- Overall: B-
Conclusion
Management looks capable but I have to question their shareholder friendliness. The company will never pay a dividend, salaries spikes are enormous, share dilution without any buybacks or open market purchases. It feels like the management team is more content with their corporate lives and benefits vs rewarding shareholders. CEO also being the chairman of the board is another point to look closely at.
Growth is limited and will mainly come from acquisitions. Business has no moat and with plenty of risks to consider the company is a little too much on the risky side even though valuation based on earnings is low.
Other Links
http://seekingalpha.com/articl…..nagement-s
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