Vishay Intertechnology (VSH) is a pure-play discrete components company poised to generate profits as electronics and technology rebound. At yesterday's closing price of 7.05, it has the potential to double to a target of 14, perhaps within the next year. Vishay recently completed the spin-off of a small portion of its operations into Vishay Precision Group (VPG), and is now focused on its core businesses.
Background - From 2002 through 2007, the company posted steadily increasing earnings, about 30% of cash flow which averaged 1.52 per share. Growth came by acquisitions, and goodwill accumulated on the balance sheet. During 2008, testing revealed impairments which resulted in large non-cash write-offs and a loss of (9.04) per share for 2008. Despite these book-keeping entries, tangible book value escaped serious damage, declining from 8.07 in 2007 to 7.30 as of year-end 2009.
I wrote the case up favorably in late October 2008 at 4.33, suggesting it as a good holding for the coming troubles and proposing a target of 15 over a 2 or 3 year time span. Vishay has since traded as high as 11.33 before coming down to the current level. The spin-off of VPG represented about 7% of revenues, a non-core business, and is a small positive to the long-term prospects.
Valuation – increasing revenues have led to improved margins. Applying recent margins to upbeat revenue guidance and looking forward, I estimate annual earnings at .94, on the low side of consensus, which stands at 1.08. Going over the balance sheet, current assets are well in excess of current liabilities. Taking anything over a current ratio of 2 as excess, and verifying that it is available as cash or equivalents, Vishay has cash of 2.77 per share in excess of what is required to run the company on a comfortable basis. .94 EPS X 12 P/E = 11.28 + 2.77 Excess Current Assets = 14.05, round to 14.
Acquisitions – from the 1Q 2010 earnings press release:
Dr. Zandman concluded, “Based on our very strong balance sheet and the improved economic environment, we are now again actively pursuing acquisitions. We are targeting small to mid-size companies. For the passive components, we aim to strengthen and broaden our position as a specialty products supplier; for the discrete semiconductors, the intent is to increase market share and exploit synergies. The goal of our acquisition activities is to further improve our profitability.”
At least the intended use of the excess funds is clearly stated by management. A few years ago they made a pass at International Rectifier (IRF) which was too big and too troubled. That didn't come to fruition. Dr. Zandman at the time stated that it was probably for the best and the current emphasis on small to medium acquisitions is reassuring. There is no question about management's ability to integrate acquisitions as the occur.
Reservations – the electronics industry is cyclical and intensely competitive. My wife used to work at a distributor, and she noted that as lead times would increase during boom times buyers would place orders for more than they needed in order to reserve their place in line. Recent comments need to be understood in that context:
Commenting on the results for the first quarter 2010, Dr. Paul stated, “In the first quarter 2010, demand for both passive components and discrete semiconductors increased again substantially compared to the previous quarter. The order levels now exceed pre-crisis levels. Inventories in the supply chain are extremely low as manufacturing capacities have not yet caught up with demand. Our distributors reduced their inventories of our products by 6% quarter over quarter; the inventory turns at distribution were 5.0 for the first quarter. The sales increase quarter over quarter was limited by our constrained manufacturing capacities, especially for our discrete semiconductors.”
Strategy and tactics – VSH has a beta of 2.1 and implied volatility of 57.7%. It is trading in the area of tangible book value and at a forward P/E of 7.5, giving credence to the .94 estimate. Short interest checks in at 3.04%, trivial. It is optionable and has shown some tendency to gap on the last two earnings reports. It looks like this one may have some pop.
I have taken up a starter position and plan to add to it ahead of 2nd quarter earnings.
Disclosure: Long VSH, no position IRF