AVX Corp. (AVX) is a global leading manufacturer and supplier of a broad range of passive electronic components and Interconnects. A subsidiary of Kyocera Electronics Corporation, the company has a significant edge over its competitors as it has research, manufacturing, and customer support facilities strategically located in approximately 15 countries.
When it comes to design and technology for new products that will certainly serve the needs and requirements of the end users, AVX is always the company to look up to. A company with a strong balance sheet, zero debt and a dividend yield approximately 97% greater than the average of its two closest competitors, its stock trades at significant discounted multiples in comparison to those same competitors. With a market cap of $2.29 billion, its stock currently trades at ~$13.60.
A little about AVX, the company and the markets it serve
AVX Corp. is a company with three reportable segments which are: Passive Components, KED Resale Components, and Interconnects. On the company's website, it describes the segments thus:
- Passive Components consists primarily of surface mount and leaded ceramic capacitors, RF thick-and thin-film components, tantalum capacitors, switch mode ceramic capacitors, power film capacitors, super capacitors, EMI filters, think-and thin- film packages, varistors, thermistors, inductors and resistive products.
- KED Resale Components consists primarily of ceramic capacitors, frequency control devices, SAW devices, sensor products, RF modules, actuators, acoustic devices and Interconnects produced by Kyocera Corporation and resold by AVX.
- Interconnect consists primarily of Elco automotive, mobile phone/PDAs, backpanel, solid state lighting and memory product Interconnects produced by AVX and Kyocera.
The Passive Components segment is the company's cash cow as it accounts for a significant part of the company's total annual revenues. The company's broad array of specialty products offerings also gives it an added advantage over its competitors. The markets it serves include telecommunications infrastructure, medical, industrial, computer, cellular, military, automotive, and consumer. In the medical field, people who are hearing and visually impaired have benefited greatly from this company's advance products. The same thing applies to those with certain conditions as the company offers implantable devices that aid in regulating and stimulating the user's heart.
It has also made a significant impact, through its high-tech products, on the rapid and steady growth being experienced in the telecom market. Its new technologies that maximize engine control, chassis control, safety and infotainment are also being lauded by the automotive industry.
Most of its products are designed to encourage living "green" as they complement renewable energy sources like water, wind, and sun. It is heavily making impact in the areas of offering products that harness the powers of alternative energy sources like hybrid vehicles, solar power generation, wind farms and high-speed trains.
According to the company's 10-K filing, its customers are
"Multi-national original equipment manufacturers, or OEMs, independent electronic component distributors and contract equipment manufacturers, or CEMs (also referred to as electronic manufacturing service providers (EMSs)."
The company continues to invest significantly in research and development and consistent annual submission of new applications, even as most of its patents are granted.
The company's OEM customers in the telecom industry include Apple, Samsung, Nokia, LG, IBM, HP, Cisco, Motorola, Alcatel, Sagem, Acer, Dell, Toshiba, Sony, Ericsson, Lucent, to mention just a few. In the medical industry, its customers include St. Jude, Medtronic, Guidant, and Starkey Lab. In the automotive industry, it serves customers like Lear Corp., Siemens. General Motors, Robert Bosch etc. In the military, avionics and space industries, its customers include Lockheed Martin, Rockwell, Raytheon, Boeing, etc.
Strong insider ownership of the company's stock
Insiders in the company (officers and directors) maintain a super high ownership of the company's stock at 72.29% insider ownership. This is significantly high when compared to some of its competitors as the table below shows.
Encore Wire Corp.
Strong balance sheet
From 1995 through now, AVX has consistently generated free cash flows, though they which peaked between 2001 and 2002. At the time of publication, the company has cash and cash equivalents valued at approximately $1.05 billion that management is simply sitting on. In terms of debt, AVX has zero debt.
Huge but fragmented customer base
Unlike a good number of businesses that depend on a few major customers for their revenues, AVX maintains a huge list of customers it offers its products to. According to management, no one customer accounts for more than 10% of the company's net sales. This means that the loss of a particular customer might not have a significant impact on the company's top and bottom line.
The investment thesis
There are several reasons why AVX makes a good play for the long term. They include:
Impressive dividends: The company currently yields 2.40%, which is approximately 97% more than what two of its closest competitors yield. The table below shows the company's dividend payment history from 1996 till date and the increase in yield. With the significant amount of cash the management is presently hoarding and the fact that the company has zero debt, I strongly believe AVX is in an excellent financial position that will see it continue paying and significantly increasing its dividend.
Share buy backs: The company's management has been actively buying back shares. In the words of Kurt Cummings, Chief Financial Officer,
"We continued to use our resources to enhance shareholder value by paying $14.8 million in dividends to stockholders and spending $2.8 million to repurchase shares of AVX stock on the open market."
The stock is significantly undervalued: Relative to a couple of its closest competitors, the company's stock is significantly undervalued as it trades at significant discounted multiples in comparison to its competitors. The table below sheds more light on the comparisons.
AVX Corp Peers
Annual Dividend Yield (TTM)
Encore Wire Corp.
Note: Average calculations do not include AVX Corp.
Now, if AVX should trade by at least 12x, which is ~35% lower than the average of 16.25x and still cheaper, it would mean a significant increase of ~80% in comparison to its current price.
Unlocking the company's value
In every sense, AVX is a financially stable company with cash that is almost half of its market capitalization and yet, its share price is weak. As an investor, I strongly believe that the company's management can unlock its value if, instead of hoarding such load of cash that has piled up over several years, it would just put the cash to good use. This could be done through strategic M&A activities that would further boost the company's value or better still, returned to shareholders in the form of significantly increased dividends and share buy backs.
On my own however, I would prefer the company to fund some strategic acquisitions that would further boost the company's value as every investors appreciates his or her money being put into good use.
Downside to the investment
AVX operates in a cyclical industry and as such, remains prone to losses and debts if the cycle turns against the company. An example is the significant decline in fiscal 2002 of the demand for the company's product, a consumers' reaction to the declining economy then. The management reacted to this trend by engaging in restructuring activities that included reducing its labor force and significantly cutting down on its operating costs. According to the company's management,
"During fiscal 2002, 2003 and 2004, we recorded $24.6 million, $3.0 million and $27.2 million, respectively, of restructuring and special charges as part of our cost reduction and realignment initiatives."
Another example is the most recent shift in consumer buying behavior which however, is improving with the economy as they (consumers) are gradually regaining their spending confidence. However, AVX has a strong balance sheet which shows it will be able to stand on its feet should the tide turn again. Therefore, the huge cash at hand greatly limits the downside of this investment.
Catalysts for further growth
- Improving consumer buying confidence
- Improving economy
- Evolution of new electronic devices
- Continued demand for electronics devices that require the company's electronic components.
- Reduction in operational costs
AVX is a financially stable company which could be valued at its true worth should management engage in activities that will further boost its value. I really believe that investors have looked on for too long and the right time to unlock the company's value is now. Add this to the management's growth strategy of maintaining an unmatched line of passive electronic components.