The electronics manufacturing services (EMS) industry is not that popular among the general investment community. The technology industry tends to be sensitive to economic cycles, so, getting into this sector when the economy is getting out of recession is the perfect time to invest. Let’s dig in to find some gold!
First, we’ll take a look at Nam Tai Electronics, Inc. (NYSE:NTE). The stock appreciated over 160% in 2012, thanks to the 118.6% year over year increase in revenue driven by the ramp up of the production of high-resolution liquid crystal display modules (LCMs) for tablets, and the commencement of mass production of high-resolution LCMs for smartphones.
Gross profit increased a whopping 449.4%. While it is unlikely the company will be able to generate the same stellar returns in the coming years, but is it still a good investment?
Slow yet steady growth ahead
The company reported that its profit margins will be under pressure this year due to increasing competition. But, this short-term headwind will be offset by increased capacity utilization. Despite the massive year over year jump in revenue in 2012, the average capacity utilization for the last quarter in 2012 was under 30%.
As the EMS industry grows, the business for the company would increase, due to which management expects to reach full capacity utilization in 2013. The company currently has a turnover capacity of $3.6 billion annually. Even if we assume an operating margin of 5.6%, moderately less than its current margin of 6.69%, it would still result in an income of over $200 million.
Healthy cash levels and appealing dividend
The company’s cash position is very strong. As of December 2012, Nam Tai Electronics, Inc. (NYSE:NTE) recorded $363 million in total stockholders’ equity, $158 million in cash, and only $13 million in debt. The company has a robust dividend yield of 4.6%. So, that’s a huge positive for long-term investors to earn a decent return.
The company has a forward P/E of 8.54, which makes it undervalued for a company which has robust growth opportunities ahead, one of the best operating margins in the industry, a strong balance sheet, and an above average dividend.
Down but not out
As a soon as a company reports numbers below estimates and issues a weak guidance, bears come rushing in and push its stock to oversold levels as if one earnings miss means the end for the company. Fortunately, it provides amazing opportunities for value investors to buy fundamentally sound stocks at a great bargain price.