On Tuesday, printed circuit board manufacturer Eltek Ltd. (NASDAQ:ELTK) published its reports, which showed that the veteran company has maintained its rapid recovery and growth, but the stock still fell. I'll start from the end. I find it hard to explain why a company that has sales of more than $41 million, reflecting 28% growth in 2006, and which earned $2.3 million net, double its profit in 2005, is traded fully diluted at a market cap of less than $30 million. Without full dilution, the company is priced at $24.2 million, and that's a pretty rare occurrence.
If we look back over recent years, since the market slump in 2002, we find that Eltek's sales rose from $24.7 million in 2003 to $29 million in 2004, $32.3 million in 2005, and then $41 million in 2006. It moved from an operating loss of $2.1 million in 2003, down to an operating loss of $754,000 in 2004, and then an operating profit of $1.66 million in 2005 which rose to $2.9 million in 2006. Its net loss fully diluted improved from $2.8 million in 2003 to $1.2 million in 2004, and it then ended 2005 with a net profit of $1.15 million, and 2006 with a net profit of $2.3 million. There is a slight problem here with the figures that the company has published since its official balance sheet is denominated in shekels (why?) and what happens is that the historical calculation in dollars is prone to error.
But whichever way you look at Eltek's reports, two facts stand out. One is that the company has demonstrated extremely impressive growth and profitability, while the value it gets on the capital market most certainly does not represent what the economists describe as "vendor-buyer value." According to the results that Eltek unveiled on Tuesday, at its present level, the stock price represents a historical multiple of 10, quite definitely an uneconomic valuation of this business.
Judging by his statement on Tuesday, Eltek's veteran and extremely guarded CEO Arik Reichart apparently expects that 2007 will be a record year, and from what I gather the chance of this happening is much higher than 50:50. The reason for this is that Eltek is a niche manufacturer in the printed circuit industry, with 71% of its development and manufacturing targeted at the medical and defense fields. These are two fields with potentially high profit margins, which employ niche companies such as Eltek.
At the end of last year Eltek was granted a license to use a technology developed by a company from California called StablCor Inc. The technology is a laminate-based thermal management system for printed circuit boards and substrates. Apparently this technology will open up new channels for Eltek, the only company outside of the U.S. to be granted a license to use it, and I hear that the management is hoping for several large contract wins in this field. It is a form of carbon composite laminate, which according to users, makes circuits 1,000 times more powerful than ordinary circuits. StablCor is a company that solves problems in semiconductor manufacturing through its unique designs. Its customers include giants such as General Dynamics, Boeing, Curtis Wright, and other U.S. industrial giants.
Why has Eltek's stock failed to respond price-wise, despite the impressive growth in its business? There are several reasons for this, one of which is the reporting in shekels, something that U.S. investors find most irritating. My own view, which I now share with you, is that Eltek is one of the cheapest investments currently on offer on Wall Street.
ELTK 1-yr chart
Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.