Jae Jun's  Instablog

Verdict

• Management: B+
• Growth: B-
• Moat: C
• Risk: C
• Valuation: B+
• Overall: B-

IEC Electronics (IEC) is a provider of electronic manufacturing services (EMS) to technology companies. The Company specializes in the custom manufacture of circuit cards, system level assemblies, a range of custom cable and wire harness assemblies, and precision sheet metal.

Their business segments consists of Military and Aerospace, Industrial & Communications, Medical and other.

The initial question I start with, but in this case, nothing jumped out screaming value.

On a side note, IEC is ranked number 3 in the 2011 Forbes Best Small Companies list and the companies that show up on this list are usually growth orientated which is why I can't conclude as easily whether it is cheap or not.

The best place to get information about management is to read the Proxy. The code for the Proxy document is "DEF 14A". You can then automatically track the SEC filings and use the method described in the tutorial for detecting changes in SEC documents.

Here are some points regarding management and their decisions.

• Insider ownership is high at 16.59%
• CEO is also chairman of the board
• Huge increase in salaries for insiders in 2011 vs 2010. CEO compensation increased 75%. Although performance targets were met, most of these numbers were possible only through acquisitions instead of actual organic business growth.
• Management does not buy back shares or buy their own stock even at low prices.

Another piece of interesting information is the debt acquired to finance acquisitions. The interest rate on these loans is between 2.5 to 4%. With such low interest rates, using debt instead of using their cash on hand is a no brainer. Nice move by management.

The murky aspect of any analysis. Always filled with what if's.

As a smaller company in a highly fragmented industry, acquiring companies to grow is a must and IEC has shown that it will acquire. As mentioned above, they have gone about it smartly the past couple of years.

IEC also has some additional potential because they do business in several segments. Revenue is diversified and if IEC locks down additional contracts for each segment, that should help drive further business.

Another aspect that is advantageous for IEC is that none of the their competitors are "giant" corporations, but on the flip side, it will be equally difficult for IEC to become a giant. At some point it will plateau.

Companies like IEC could claim all sorts of strategic advantages, but in reality there is none.

By none, I mean none of the claims are durable. A competitor could easily do the same thing. Here are some strategic advantages the company claims. You judge for yourself.

• Company strategy is to focus on creating manufacturing partnerships with new and old OEM's. This allows IEC to have a broader product line without a need to buy out every company.
• Another way of looking at it, IEC depends on having really good relations with customers. Help the customers save money, and then make it difficult for the customer to switch to another company because the service is so good. If a customer is saving money and happy with IEC, why would they want to change?
• By having multiple manufacturing partnerships, rather than just supplying a certain part of a product, IEC can provide parts for the entire supply chain and build the entire product for the customer.
• It would be better to be the low cost provider in this industry, but IEC is not.

There are plenty of companies, both private and public, that provide the same type of service.

With a lack of durable strategic advantages as explained in the previous section, it's expected that plenty of competitors exist.

The one thing I can see that sets IEC apart from their competitors is their military and aerospace business segment. Due to regulations, the government is not allowed to purchase from suppliers outside the USA.

Always protect the downside. Apply risk protection methods first and the upside will take care of itself.

Refer to the risks associated with the company.

Inventory Risk

• Does not hold too much inventory (could be an advantage actually).
• Has to purchase raw materials up front or receive them from customers. Uses turnkey services which could be a problem is the supplier does not have the required parts. Also it means IEC has to purchase small quantities regularly which is more expensive than buying in bulk.
• Obtained 53% of materials from two suppliers. If a relationship broke down with any one of the two, it would cause big delays and losses.

Concentrated Customers

• Concentrated customers. In 2011, Sigma represented 16% of revenue, GE represented 10% of revenue and the top 5 customers make up 45% of revenue.
• 56% of revenue come from military and aerospace. Any reductions in military and aerospace budget will affect IEC.
• Customers do not commit to long term production schedules. They could cancel, delay or change orders any time.
• Solvency will be an issue if they lose just one major account.

IEC's business has turned around since 2005. Margins have dramatically increased compared to early 2000's and the company is cheap on a P/S basis. P/B and P/Tangible Book is on the average side.

ROE has been excellent, but the use of debt has been helping. ROE since 2005 has been 23% average. Compare with CROIC which is 17% during same period. Still high but the number has dropped to 8.3% in 2011.

Long term debt has increased due to the acquisitions, but with such low interest rates, it shouldn't be a problem.

Inventory turn has decreased from 2010 to 2011. This only confirms that the top line growth was from acquisitions.

Share dilution seems to be an issue. Increases by about 5% annually.

Has an extraordinarily high accrual buildup. Accounting isn't very good. Red flag.

Using a couple of quick stock valuation tools to check out what the market is expecting from the current stock price;

• Reverse DCF shows the market is expecting about 5.5% growth with a 12% discount rate.
• A reverse Graham valuation with EPS of $0.68 so the expected growth to be 1%.

Some potential business developments that could help IEC.

• Government defense budget is not cut
• USA gets involved in another war (hope not)
• Acquisitions proves to do well
• Partners with several additional suppliers to stabilize its distribution channel
• Diversifies customer base without losing sales

• Was created through a merger in 1990
• Founded in 1966
• Acquisitions in each of the past 3 years
• 33% higher backlog in 2011 vs 2010
• Acknowledges that employees are biggest assets
• Good relations with employees. No work stoppages, no unions. Only 1 review on glassdoor.com but it's a good one.
• Certain "covenants in IEC's credit agreement with Manufacturers and Traders Trust Company restrict the Company from paying cash dividends."

Management looks capable but I have to question their shareholder friendliness. The company will never pay a dividend, salary spikes are enormous and there will be consistent share dilution without any buybacks or open market purchases.

It feels like the management team is more content with their corporate lives and benefits vs rewarding shareholders.

Growth is limited and will mainly come from acquisitions. Business has no moat with plenty of risks to consider.

Ultimately, the company is a little too much on the risky side, even though valuation based on earnings is low.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

ADDvantage Technologies Group, Inc., through its subsidiaries, distributes and services a line of electronics and hardware for the cable television (CATV) industry. The products, the Company sells and services are used to acquire, distribute, receive and protect the communications signals carried on fiber-optic, coaxial cable and wireless distribution systems. Its customers provide a range of communications services, including television, high-speed data (Internet) and telephony, to single family dwellings, apartments and institutions, such as hospitals, prisons, universities, schools, cruise boats and others. The Company’s operating subsidiaries include Tulsat Corporation (Tulsat), Tulsat-Atlanta LLC, ADDvantage Technologies Group of Nebraska, Inc. (doing business as Tulsat-Nebraska), ADDvantage Technologies Group of Texas, Inc. (doing business as Tulsat Texas), Jones Broadband International, Inc. (doing business as Tulsat-West) and ADDvantage Technologies Group of Missouri, Inc.

Why is it Cheap?

• boring business
• reseller of equipment to companies such as comcast, direct tv, centurylink etc
• industry risk. Consolidation could mean loss in revenue. Customers have slowed down their network upgrades.
• builds up inventory of new and used equipment to sell
• not followed or held by any of the big boys

Management

• not much insider buying even at these low levels
• total exec compensation was 2.4% of revenue in 2010. Below my 3% threshold so good.

Growth

• not much room for growth. But with such a healthy balance sheet, their returns does not have to be high to produce growth.
• market is assuming that the max it can do is 4% growth by reverse engineering prices
• acquisitions will help with growth. Their acquisitions are small and targetted based on the target's distribution channel and product offerings.

Moat

• Niche player. Can't beat the OEM's in providing equipment, but does take advantage of the many black holes left behind by them.
• sustainability is absent though. A new competitor with money could come overnight and take them out.

Competitors

• competitive business
• trading at net net value means there are better competitors otherwise it wouldnt trade below asset value

Risks

•  inventory valuation. If it had to be liquidated, how much would it be worth?
• Strategy of building up inventory – very low inventory turnovers. All costs money and working capital.
• New agreement with CSCO isn't the best. They now have to resell CSCO products which will lower margins.
• no dividends. just builds cash.
• dont see much chance of buyout for such a company

Valuation

• no matter what I try, I keep coming up with a low range of $2.80 to $3 which gives 34% upside potential as a minimum.
• Operating at low end of business cycle as the industry has slowed down. Cash flow will reduce.
• I'm estimating EPS of $0.28 for 2011 without doing much more work.

Catalysts

• Industry starts spending for network upgrades
• (hmm can't think of many catalysts other than being cheap)

Conclusion

Quality net net currently operating at the down cycle. Room for revenue and cash flow growth if the industry picks up. A bit too reliant on external factors but management has been able to handle the business very well. Great ROE, CROIC for a net net. Not many profitable ones out there. Business is easy to understand and the biggest risk really comes down to whether the inventory is really worth what it is.

I wouldn't call it a value trap because their business model is consistent.

Verdict

• Management: B
• Growth: C
• Moat: C
• Risk: A
• Valuation: A

Buy a small position and wait for a long time to play out.

Other links on AEY

http://www.whopperinvestments……logies-aey

seekingalpha.com/articl…..good-price

seekingalpha.com/articl…..addvantage

seekingalpha.com/articl…..-micro-cap

The past two months makes me want to believe that the economic recovery is looking good. Markets have consistently been rising, and so has my portfolio so I am not complaining.

I've put a lot of cash to work over the past 2 months. Cash made up about 35% at one point of the year, but that has been drastically reduced down to 8% by the end of October.

The portfolio certainly has come a long way from the bottom of -20% mid way through the year.

I'm aiming to break even. It doesn't matter whether or not I beat the market every year, as long as I don't lose money because I know that in the long run, I will beat the market.

Bought ADBE

Couldn't resist buying ADBE when it dropped 20% following earnings. ADBE stock valuation and reasoning here.

Bought YNGFF

I first came across this valuable idea from Pakiya Funds. Sat on my bum taking my time while the stock was at $0.37. Now it is over $0.80 already.

I'm not an expert on precious metal producers but after reading as much as I can on the company, YNGFF is clearly cheap on a cash flow basis. Next year should be exceptional with the anticipation of production hitting estimated targets.

To learn about YNGFF begin by reading the following links.

• Drew Clark: Adding Value Through Growth
• Yukon Nevada Gold Byron Capital research report
• Yukon Nevada Gold Hallgarten Research Report
• Yukon Nevada Gold presentation

Above Average Odds has come great material as well.

• Yukon Nevada Gold (YNGFF.PK) – Still Stunningly Cheap
• Investment Analysis: Yukon Nevada Gold (YNGFF.PK)

There is also more learning material in the forum on precious metal miners.

• ORVMF Orvana Minerals

Sold BOLT

Reduced the position slightly to free up some cash. No other reason.

Bought MMPIQ

I thought I was finished with bankrupt stocks but MMPIQ looks to be a very good prospect. A very small portion of the portfolio with a floor around 25c and upside much higher.

A quick read up can be found on the MMPIQ stock analysis by AQ Value. More info on MMPIQ can be found at AQ Value.

Bought SUNH

SUNH will soon be completing its spinoff. Spinoffs are always good opportunities but I am especially eager about the spun off child Sabra. Sabra will become a standalone healthcare REIT.

Read these links (Thanks to Stock Spinoff Blog)

• Sun Healthcare Real Estate Spinoff Nears
• SUNH Spinoff press release
• SUNH Spinoff presentation
• SUNH investment presentation on Valuehuntr

Bought RDI

An investment with a catalyst.

Reading International operates movie theaters as well as own land. The company has a presence in Australia, New Zealand and USA.

Having lived in Australia for most of my life, and having been to many of Reading Cinema's and knowing the land location of a few of its properties, RDI looks to have a big margin of safety.

Fund manager Andrew Shapiro has been following RDI for years and has plenty to say about the company on his Seeking Alpha page.

This is an opportunity based on discount to assets. People against the idea have been arguing that cinemas will die but that point is completely off track from the investment thesis.

Sold INSM

Simply needed to free up cash. INSM was one of my biggest positions but I cut it down as better ideas came along.

Bought RHDGF

Most definitely my favorite investment of the year.

Cheap on a sum of the parts valuation. Huge margin of safety. Clearly plenty of upside potential with low risk.

Read about it before Wall Street catches on.

Looks like somebody else has written about RHDGF. Good article but very similar to the linked pdf.

Sold APNC

My growth expectations were incorrect. Made a mistake and selling at a loss of about -23%.

Made to Stick: Why Some Ideas Survive and Others Die

Fantastic book on how to package your ideas in order to make it stick in the minds of people. Useful in everyday life as well as investing.

Go read it.

The link is an Amazon affiliate link. I'll receive 50c or so for referring you. If you can't stand the idea of me receiving 50c, still make sure you purchase it by searching the title yourself.

Long all positions except APNC.