At first glance, AVX Corporation (AVX) looks like a steal. At Friday's close of $10.89, the stock sports nearly $6 per share in cash net of long-term liabilities, and trailing earnings of 90 cents per share. Fiscal year 2012 (ending March 31st) free cash flow was $100 million, nearly 12% of the company's $850 million enterprise value. With analysts projecting modest growth over the next two years, and production of worldwide electronic devices seemingly increasing long-term demand for AVX components, AVX looks dramatically undervalued.
But there are some downside risks for the stock. Of the company's $1.05 billion in cash, some $470 million is held outside the U.S., according to the most recent 10-K. And sales -- and profits -- fell year-over-year in FY12. As the company itself notes in the 10-K, "prices for existing products tend to decrease over their life cycle," putting constant pressure on margins and the company's cost control processes. AVX is also 72% owned by Kyocera (KYO), limiting shareholder control of the company.
Another key overhang for the stock is a recent EPA consent decree related to the company's responsibility for a Superfund site in New Bedford, Massachusetts. The EPA has estimated additional costs at the site of some $401 million. The company itself admitted in the 10-K that implementation of the EPA's administrative order is "probable" and estimated costs to AVX between $100 and $730 million, or between $0.59 and $4.29 per share.
But with the recent decline in AVX's share price -- the stock is nearing a 30-month low -- much of the bad news seems priced in. Indeed, AVX's $1 billion in cash still more than covers repatriation of the foreign cash at a 40% tax rate and the company's highest estimate of the New Bedford cleanup costs.
Under the worst-case scenario, AVX would still have about $80 million in cash remaining, and trade at a trailing P/E of 12. The company's dividend yield -- after dividend raises in 2010 and 2011 -- would remain at its current 2.75%, with the payout ratio a still-reasonable 33%. At that reasonable valuation, investors would be buying into a company with a history of long-term success and exposure to the growing worldwide electronics industry. The coming explosion of the middle class in India and China -- and their subsequent demand for cell phones, tablets, and other devices -- should help reverse FY12's sales decline going forward.
So, in the worst-case scenario regarding its foreign cash and potential Superfund exposure, AVX looks reasonably valued. But should the EPA costs come in closer to the middle of the company's projected range, that would save the company roughly $2 per share. A repatriation holiday could boost the company's value by another $1 per share. And a rebound in the company's cyclical, economically sensitive business could drive earnings higher in the medium term.
In short, AVX doesn't look like a particularly explosive stock pick; but at current levels it offers significant downside protection. With an easily-covered 2.75% yield, an excellent cash balance, and a history of solid earnings and free cash flow, AVX should survive the short-term headwind from the EPA's decision.