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Summary

  • Eltek's CEO expects a 20% capacity increase along with significant efficiency improvements by 4Q 2014. But positive effects of this program will start being seen in the current quarter.
  • In a recent interview, new majority owner Nistec envisions doubling plant capacity in the near term.
  • Eltek is busy attending industry conferences and gaining important industry qualifications and certifications to take advantage of new plant capacity and greater operating flexibility.

Eltek Ltd. (NASDAQ:ELTK), established in 1970, manufactures and supplies technologically advanced, custom made circuitry solutions for use in compact electronic products. The Company provides specialized services and is a solution provider in the PCB business, mainly in Israel, Europe and North America. Eltek's largest markets are: 1) defense and aerospace, 2) medical equipment, 3) industrial, 4) telecom, and 5) others. The company is a trusted PCB supplier to almost 400 global clients, mostly in the US and Israel.

Eltek Inc., differentiates itself from its competition by:

Adding significant engineering value in early design phase.
Providing innovative, cost effective and reliable solutions.
Focusing on increasing reliability and durability for mission-critical applications.
Implementing value-added engineering methods.
Searching for and using advanced based materials and technology to meet the most stringent client requirements.
Continuously investing in state of the art equipment and manufacturing techniques.
Sharing with clients its accumulated engineering knowledge.

ELTK has traded sideways in an amazing narrow range for almost 5 years despite having reported 10 consecutive GAAP-profitable quarters prior to a huge November 2013 spike that took the stock from $1.5 to almost $4. The gain occurred after the announcement on November 1, 2013 that Nistec Ltd., a leading provider of Electronic Manufacturing Services ("EMS") and design services based in Israel, had acquired 50.5% of ELTK by investing a total of $6.5 million.

Nistec Ltd., founded in 1985, is a leader in the delivery of innovative electronics manufacturing & design services. The company serves more than 300 customers in diverse industries such as telecommunications, RF, medical, defense and aerospace. Nistec's unique suite of solutions spans the entire product lifecycle - from design, manufacturing and systems integration, to order fulfillment and after-market services. Prior to the acquisition of Eltek, Nistec bought PCBs from several approved suppliers.

The November rally was fueled by the low 4-million share float and anticipation that Eltek would provide more color about the effect of the Nistec cash infusion going forward in ELTK's 3Q 2013 earnings release/CC (late November 2013). The stock price has retreated to the current $1.45 after two disappointing quarters.

It appears that investors expected an instant increase in production and profitability. But, as history has shown, many transitions in management and philosophy do not always result in immediate positive changes. However, I now expect improved results going forward for the following reasons:

Eltek's CEO expects a 20% capacity gain by 4Q 2014 after implementing several debottlenecking projects (per most recent CC comments). New owner Nistec wants to double production capacity in a recent interview.

The same projects will improve efficiency and therefore increase gross margins.

Eltek received Nadcap Accreditation for its advanced circuitry solutions.

Eltek is attending more industry conferences and expositions recently than in previous years.

The CEO has said in the latest CC that they are aggressively pursuing ways to reduce operating costs.

The way that I read the CEO's last CC comments that: 1) they are actively implementing their capital plan to increase production, and 2) that the 20% production increase will be realized in 4Q 2013, is that we will start seeing improvements starting this quarter. As a project engineer myself, I know that debottlenecking projects are executed as opportunities arise to make changes in areas where constraints are known or where technological improvements are expected to improve yields, efficiency, and product quality. Project engineers implement these changes one at a time so that production rates are not affected significantly. This is particularly true in cases such as Eltek's which has only a single production line with no spares. Therefore, in order to see a 20% jump in capacity in 4Q 2014, it's very likely that efficiency and production improvements will become effective starting with the current quarter. Additionally, removing current constraints will enable Eltek to execute quick deliveries to key customers. In the current high-demand climate, Eltek's customers usually pay a premium for quick deliveries in case they need them.

In recent conference calls Eltek's management stated that it was losing revenue/income opportunities because of capacity and efficiency limitations with its existing manufacturing facilities. For instance in the 2Q 2013 earnings release, Arieh Reichart, president and chief executive officer of Eltek commented: "For three consecutive quarters Eltek has seen growing demand from its current customer base, but production capacity constraints prevented the full exploitation of this potential. Our customers continue to see the value proposition of our products and have a great deal of trust in our company. Specifically, in our local market, we have seen greater interest from our local customers, reflecting the continued market recognition of our high quality and reliable products."

Regarding Nistec's investment, Mr. Reichert commented, "We are pleased with Nistec's decision to invest in Eltek. This significant investment is an important validation of our vision and achievements and will support our long-term growth plans. This investment will enable Eltek to fully realize its growth potential as well as other opportunities in the diverse markets we serve."

Among the technological improvements that I expect will be implemented is the installation of one or more of Camtek's 'GreenJet' soldermask printers. The $300,000 GreenJet printer is designed for the deposition of solder mask on PCBs. The GreenJet printers directly address a critical, costly and frequent complication during PCB manufacturing process: misalignment. As PCBs become increasingly crowded in order to fit more electrical components with more links on smaller boards, perfect alignment is essential. In summary, the GreenJet printer is expected to minimize alignment issues, reduce the number of operators needed to run this part of the process, reduce the 4-step solder mask deposition process to a 1-step process thus reducing cycle times - the bottom line is lower production costs, greater efficiency and improved and more consistent product quality.

An article by fellow SA contributor Jonathan Fishman includes the following table which compares the GreenJet printer and two competing widely-used technologies:

Technology

DFSM

LIPSM

GreenJet

Tools needed

4

4

1

Employees Needed Per shift

4-5

4-5

1

Consumables

Dry Film

Soldermask ink

Soldermask Ink

Capital Costs: Equipment Only

~$2-3M

~$2-3M

$300K

Manufacturing area required

3000ft^2

3000ft^2

300ft^2

Printar, which was acquired by Camtek (NASDAQ:CAMT), chose Eltek as its test site for the GreenJet. According to Camtek, and according to Eltek as well, after many years of development, the machine now performs extremely well and is expected to revolutionize the industry.

It is clear that ELTK will make a significant step change in capacity of about 20% this year and along with that there will be a significant improvement in efficiency, gross margins, and faster response to meet client's requirements.

But doubling the production capacity is the ultimate vision of Mr. Yitzhak Nissan, Nistec's founder and CEO and Chairman of Eltek's. Mr. Nissan is the kind of person that does what he says, and does it with the outmost professionalism. Mr. Nissan's vision of where he wants to take Eltek was recently published and can be found in Nistec's website.

Mr. Nissan is a leader in the Israeli electronics market, having served as a Presiding Member of ILTAM (Israeli Users' Association of Advanced Technologies in Hi-Tech Integrated Systems) between 2008 and 2009, and as a Presiding Member of the Israeli Association of Electronics and Software Industries since 2012. Mr. Nissan also established the VPs Operations Forum, which brings thought leadership to 200 VPs of operations from diverse hi-tech companies in Israel.

Mr. Nissan runs Nistec as one of the jewels of Israel's manufacturing industry. The company's plants, methods, procedures, and employee-satisfaction ratings have won several awards from various Israeli trade and government organizations. I believe Mr. Nissan's management style and influence will have a significant positive effect in Eltek's operating results going forward. He will not accept mediocrity - which is what Eltek has done in the last two quarters, and the reason for the share price decline.

The Nistec deal has increased Eltek's share count of outstanding shares to about 10.1 million. When considering Nistec's ownership and the current institutional holdings, the current public float is approximately 4 million shares. The stock at the current price is extremely undervalued. Zacks ranks ELTK as one having the lowest price-to-book and lowest P/E ratios in the electronics components industry. And if one considers the potential Nistec-influenced growth that is about to unfold, the share price could potentially double or even triple to get anywhere near fair valuation.

Conclusion:

I believe ELTK is a safe investment with potentially significant upside if the company can successfully execute its short and long-term plans. The improved balance sheet and expected revenue, gross profit, and net income gains going forward as a result of capacity and efficiency gains resulting from Nistec's cash infusion/influence are reasons why I think the downside is minimal. But as with any investment in the stock market, there are risks involved in buying ELTK stock. For instance, if a debottlenecking project is poorly executed, there could be production cutbacks because of the single-line nature of the current process. This could damage relationships with key customers who depend on timely deliveries of components made by Eltek. And as many investors who participated in the November spike now realize, investing in low-floaters like ELTK could be risky if expectations are not materialized. As a general rule, investors considering buying this, or any other stock, should always read carefully the risks and uncertainties as spelled out in the company's 10-K and 10-Q filings.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Eltek Ltd.: With Growth And Efficiency Improvements Just Ahead, This Could Be The Right Time To Buy Stock