I was recently introduced to IEC Electronics (IECE.OB) and as I work through the story I continue to get excited. As a micro and small cap investor I am always looking for a solid story where I feel like I have a chance to get involved early. IEC is an electronics contract manufacturer focusing on high-end, complex assemblies. This results in lower volume, higher margin business, as opposed to contract manufacturers such as Flextronics (NASDAQ:FLEX) or Jabil (NYSE:JBL) which base their models on high volume business making items such as MP3 players. IEC serves customers in the military, aerospace, medical, communications, and industrial segments with recognizable customers such as L3, ASML, GE, BAE Systems, and Viasat.
Unlike so many other companies its size, IEC is solidly profitable and growing. Reported FY:08 EPS of $1.12 certainly catch the eye, but after backing out tax gains related to the firm's NOLs, EBT/share comes out $0.175. Further analysis of the income statement yields a number of reasons for optimism:
- FY:08 (year end Sep 30) revenues grew 24.9%.
- FY:08 gross margin was 12.2% and expanded to 14.1% in Q1:09. This compares to (typically) mid to high single digit gross margins for larger contract manufacturers.
- Operating margin nearly doubled in FY:08, going from 2.4% in FY:07 to 4.7% in FY:09. Operating margin expanded again in Q1, rising to 6%. Clearly this business has operating leverage.
- Year end backlog at Sep 30 was $40.4 million, versus $22.3 million a year ago.
Further reading of IEC's SEC filings and recent press releases - and the Q1 release in particular - lends further cause for optimism. In that release, the company comments that it is winning new business and taking market share. In the coming quarters the company says it intends to focus heavily on the medical technology business, where its focus on complex assemblies is well suited. Also, IEC continues to pay down its debt. Combined short and long term debt has gone from $12.4 million as of Q3:08 to $8.3 million as of Q1:09, clearly demonstrating IEC's financial strength. What's more, reading through the SEC filings shows that IEC's debt carries terms that are far from onerous at roughly 4% all-in. Given these points, a debt/equity ratio that might have appeared high at first blush is now something I am quite comfortable with.
Of course, the crux of the argument isn't what the company has done, but what it may do. I have been working on my earnings model and IEC certainly seems capable of producing EPS of at least $0.30 in 2009. Q1 EPS came in at $0.06, including a non-cash effective tax rate of 35.4%. Thus, the current run rate would be $0.24. As I noted earlier, per IEC's comments, new business has been won which would imply continued top line growth. Assuming very modest sequential improvements in revenue, even if I hold margins constant with Q1, an EPS level of $0.30 is attainable. If the company can continue its recent trend of margin expansion, then my estimate ought to be low.
The shares currently trade on the OTC bulletin board and tend to be illiquid, which leads me to conclude this company remains relatively undiscovered. If the company continues to execute, that won't last long.
Disclosure: I am long IECE.