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On 12/20/2011 we alerted our premium members that we coded SMTX as a GeoBargain @ $2.74.

SMTC Corporation (SMTX)

Company Description: A mid-size provider of end-to-end electronics manufacturing services ("EMS")

Data Ended 2/01/2012

  • Price = $ 3.17
  • Geo Taxed Adjusted Trailing EPS = $0.17
  • 2011 EPS Guidance = $0.27
  • 2012 EPS Guidance = $0.47 to $0.59
  • Tax Adjusted EPS Guidance for Fiscal 2011 = $0.23
  • Tax Adjusted EPS Guidance for Fiscal 2012 = $0.36 - $0.44
  • P/E based on Geo Taxed Adjusted Trailing EPS = 18.6
  • P/E based on Fully-Taxed Guidance for Fiscal 2011 = 13.8
  • P/E based on Fully-Taxed Guidance for Fiscal 2012 = 7.9 (based on midpoint guidance of $0.40)

SMTX is not paying a full U.S. tax rate. Therefore, all EPS numbers have been adjusted by the GeoTeam to reflect a tax rate of 36%. Also, EPS has been adjusted for certain non-cash and non-operating items.

Criteria Check List

SMTX meets 7 out of 10 of our most important requirements for growth and risk-based quantitative data. All of the following data is based on non-GAAP and fully taxed assumptions.

Requirement Comments
No Recent 52-week High(generally within 3 months) Must Reach $3.74
Yes Strong EPS Growth Rate Based on 2012 company EPS guidance
Yes > 30% EPS Growth Rate
  • 2012 EPS are expected to grow 74%
Yes GeoPowerRanking [GPR]; Number of consecutive quarters that EPS is expected to grow at least 30%. GPR of 4
Yes 10% Revenue Growth 15% growth rate based off mid-point 2012 Revenue guidance of $240 to $260 million
No Strong Operating Cash Flow and Balance Sheet As of 3rd Qtr.. 2011
Yes Positive Cash Flow

$1.6 million

No Long Term Debt to Equity Ratio less than 20% 59%
No Current Ratio is at least 2:1 1.6:1
Yes Days in receivables < 90. This shows that the company converts its account receivables to cash within 90 days. (measure of liquidity) 53
Yes Return on Equity is at least 15% Tracking at ~30% based on 4th quarter financial guidance
No Minimum Pre-tax Operating Margins of 8% ~3% to 4%implied by 2012 financial guidance
Yes Preferably Under 50 Million Shares 16.2 Million shares as of 3rd Qtr. 2011
Yes High Insider Ownership (generally greater than 15%) 17% (Yahoo)
Yes Limited Institutional Ownership (generally less than 20%) 13.4% (Yahoo)
Yes P/E Divided by Growth Rate (PEG Ratio) is Less Than 1. 0.25

Additional risk factors to consider in analysis

  • Effective Internal Controls: Yes
  • Need to raise capital: No

Reasons for Optimism

  1. Restructuring efforts are starting to pay off.

    "SMTX's objective is to create increasing long term value to its stockholders through continuing growth in sales, profitability and debt reduction. A cornerstone to SMTC's strategy is our customer-centric focus throughout the organization."

    More specifically, the company has defined specific revitalization initiatives that we believe will allow the company to drive sales and profits, while strengthening its competitive position. Some of the notable details include the following:
    • Acquisitions- SMTX will look to acquire companies and customer accounts to obtain more quality customers, leverage existing fixed costs and penetrate new markets. Part of this focus will be to gain access to customers who desire to gain exposure to the Chinese market where the company already has a manufacturing partner, but will soon operate its own facility.
    • Customer Focus- SMTX aims to earn a higher wallet share per customer (to attain more sales from existing customer accounts). This falls in line with their goal to maintain a higher quality customer base. The company has also increased its emphasis to be more aware of product life cycles so they are ready to meet customers' needs before new product cycles begin.
    • By investing in manufacturing, engineering, supply chain and quality process improvements, the company now runs a more efficient organization. The company has also centralized, integrated and simplified departments. This has fostered a more tightly knit organization where communication among employees has improved.
    • The company will strive to attract, motivate and retain the best possible talent. SMTX expects its managers to be more involved in the sales process and has created a more incentive-based environment. The company now expects its sales force to become more intimate with its customer base

      To see more on SMTX's revitalization initiative please see their investor presentation.

  2. Favorable industry trends- Starting in the 1980's, through-hole mount technology for placing electronic components began to transition to surface-mount technology. In laymen terms, surface-mount technology has enabled companies to include more components on circuit boards, utilizing less space. This benefits companies like SMTX that specialize in providing surface-mount technology applications. In 2001 the industry imploded when the dot com bubble burst. Margins for companies like SMTX were negatively impacted due to industry over capacity versus demand. Since then, this imbalance has gradually reversed, which is helping to drive sales and margins for industry participants that were able to adapt. Companies with a good footprint in the surface-mount technology industry will be able to address the needs of customers who want to include more components on less space. This desire of companies to put more on less is only intensifying as the mobile nation gains speed. Furthermore, ample growth opportunities exist as OEM'S increase outsourcing activities. Currently, OEM's only outsource a minimal percent of their surface mount needs. Ultimately, many companies want to outsource manufacturing to focus on customer service, product engineering and design.
  3. Maximizing Profit Margins:
    • Favorable operating leverage due to excess capacity.
    • Net income can grow faster than sales.
    • Increase Wallet Share. The company will eliminate customers where pricing does not lead to profitability. They will instead maximize pricing to get maximum margin out of new and current customer accounts.
  4. Improved visibility is another positive factor that drew us to SMTX. In the past the company has only provided limited financial guidance. However, the company has now provided guidance not only for the fourth quarter of 2011 of $69 million in revenue and EPS of $0.16(vs. $0.06 in 2010 fourth quarter) but also provided full year 2012 guidance of $240 to $260 million in revenue and EPS of $0.47 to $0.59 (vs. implied 2011 EPS of $0.27 based on company guidance)
  5. The new management team has a track record of turning companies around. Dave Sandberg (Chairman of the Board), a very successful activist fund manager who is focused on turnarounds, is currently working to improve the earnings of the company. David Sandberg founded Red Oak Partners, a New York area hedge fund with approximately $24 million in assets. It invests in under-followed or mispriced micro-cap situations, sometimes becoming an activist for the companies goals. Red Oak has a successful track record of around 15% compounded annual growth rate (CAGR) and was instrumental in the Asure Software Inc (ASUR) turnaround story. ASUR has seen its stock rise from the low $2's to a recent high of $8.95 since Red Oak became its advisors in January 2009.

GeoTeam overall subjective/confidence comfort level: Pertains to the ability of a company to achieve solid and consistent EPS growth over the next several quarters (from 1 to 10): 7

Potential Valuation Scenarios if the company can achieve its EPS growth goals (We believe that company guidance could be fairly conservative, offering upside to our valuations scenarios).

Short-Term Potential value based on fully taxed adjusted trailing EPS

P/E 20 * $0.17 = $3.40
P/E 25 * $0.17 = $4.25

Note: As 2011 comes to an end, we believe it is more appropriate to apply tax adjusted 2011 EPS guidance of $0.27

P/E 20 * $0.23 = $4.6
P/E 25 * $0.23 = $5.75

Short-term Potential value based on the midpoint of 2012 fully Implied EPS Guidance

P/E 15 * $0.40 = $6.00

Long-term (Twelve months) Potential value based on midpoint 2012 EPS estimates

P/E 25 $0.40 = $10.00

Caveats:

  1. Company is not recession resistant. Could be fairly sensitive to changes in the U.S. economic outlook.
  2. P/E expansion may be difficult due to industry
  3. Has no investor relations campaign
  4. Even though visibility has improved, outlook in this industry beyond 6 months can still be challenging.
  5. Stock has unsuccessfully attempted to break through $3 to the upside several times, however, if shares convincingly crack $3.08 (which we believe will happen soon) momentum investors could find SMTX.

Footnotes:
1. Valuation scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.

2. Our analysis is based on Quantitative and Qualitative factors. Even if a company does not meet the majority of our quantitative requirements, strong qualitative factors can still influence our optimism for a given story. Furthermore, gaining alpha in a market entails finding companies before the masses do, which means that their is value added when one can identify stocks that may currently have weaker quantitative data, but will soon improve. The GeoTeam typically considers EPS Growth, Revenue Growth and PEG Ratio as the most important quantitative attributes that affect short term valuation.

Source: SMTC Corporation Revitalization Initiatives To Drive Sales And Profits