IEC Electronics (IEC) 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.
Their business segments consists of Military and Aerospace, Industrial & Communications, Medical and other.
The initial question I start with, but in this case, nothing jumped out screaming value.
On a side note, IEC is ranked number 3 in the 2011 Forbes Best Small Companies list and the companies that show up on this list are usually growth orientated which is why I can’t conclude as easily whether it is cheap or not.
The best place to get information about management is to read the Proxy. The code for the Proxy document is “DEF 14A”. You can then automatically track the SEC filings and use the method described in the tutorial for detecting changes in SEC documents.
Here are some points regarding management and their decisions.
Another piece of interesting information is the debt acquired to finance acquisitions. The interest rate on these loans is between 2.5 to 4%. With such low interest rates, using debt instead of using their cash on hand is a no brainer. Nice move by management.
The murky aspect of any analysis. Always filled with what if’s.
As a smaller company in a highly fragmented industry, acquiring companies to grow is a must and IEC has shown that it will acquire. As mentioned above, they have gone about it smartly the past couple of years.
IEC also has some additional potential because they do business in several segments. Revenue is diversified and if IEC locks down additional contracts for each segment, that should help drive further business.
Another aspect that is advantageous for IEC is that none of the their competitors are “giant” corporations, but on the flip side, it will be equally difficult for IEC to become a giant. At some point it will plateau.
Companies like IEC could claim all sorts of strategic advantages, but in reality there is none.
By none, I mean none of the claims are durable. A competitor could easily do the same thing. Here are some strategic advantages the company claims. You judge for yourself.
There are plenty of companies, both private and public, that provide the same type of service.
With a lack of durable strategic advantages as explained in the previous section, it’s expected that plenty of competitors exist.
The one thing I can see that sets IEC apart from their competitors is their military and aerospace business segment. Due to regulations, the government is not allowed to purchase from suppliers outside the USA.
Always protect the downside. Apply risk protection methods first and the upside will take care of itself.
Refer to the risks associated with the company.
IEC’s business has turned around since 2005. Margins have dramatically increased compared to early 2000′s and the company is cheap on a P/S basis. P/B and P/Tangible Book is on the average side.
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.
Long term debt has increased due to the acquisitions, but with such low interest rates, it shouldn’t be a problem.
Inventory turn has decreased from 2010 to 2011. This only confirms that the top line growth was from acquisitions.
Share dilution seems to be an issue. Increases by about 5% annually.
Has an extraordinarily high accrual buildup. Accounting isn’t very good. Red flag.
Using a couple of quick stock valuation tools to check out what the market is expecting from the current stock price;
Some potential business developments that could help IEC.
Management looks capable but I have to question their shareholder friendliness. The company will never pay a dividend, salary spikes are enormous and there will be consistent 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.
Growth is limited and will mainly come from acquisitions. Business has no moat with plenty of risks to consider.
Ultimately, the company is a little too much on the risky side, even though valuation based on earnings is low.