Global manufacturing may have been shifting from the United States to China in recent decades, but U.S. manufacturers still contributed $1.87 trillion to the economy and employed an estimated 17.2 million people in 2012, according to the National Association of Manufacturers. Meanwhile, every dollar spent in the sector adds another $1.48 to the economy, producing the highest multiplier of any economic sector and making it a priority for politicians.
For customers, U.S. manufacturers are by and large the most productive in the world, far surpassing the worker productivity of any other major manufacturing economy. The industry's $77,060 average annual salary - higher than the $60,168 national average - ensures that these workers are both happy and mindful on the job. As a result, U.S. manufacturers tend to produce products with fewer errors and higher quality than other countries.
In this article, we'll take a look at one niche U.S. manufacturer that's capitalizing on a new trend in manufacturing - outsourced on-shore manufacturing.
Moving Manufacturing Back On-Shore
The statistics above make it apparent that companies should reconsider U.S. manufacturers for many jobs in lieu of overseas options. And, after years of pursuing lower costs, many companies are beginning to shift their thinking in this direction. For example, Apple Inc.'s (NASDAQ: AAPL) CEO Tim Cook recently expanded manufacturing operations in the U.S., saying, "we've been working for years on doing more and more [manufacturing] in the United States."
These trends are being further supported by rising labor and transportation costs in China that are increasing prices at the same time as working conditions are being scrutinized. In fact, these factors were likely responsible for Apple's decision following the controversy at its Foxconn manufacturing plants in mainland China. Even more surprisingly, many Chinese conglomerates are setting up shop in the U.S. in order to avoid anti-dumping tariffs, according to Business 21.
Growing, Niche, U.S.-based Manufacturer
Probe Manufacturing Inc. (OTC Markets: PMFI) is a global design and manufacturing firm for original electronic equipment manufacturers with a 23,000 square foot facility in Irvine, California and 16,000 square foot facility in Utah that aims to capitalize on these trends. The company's customers come from industrial, instrumentation, medical, aerospace, defense and automotive industries, providing value-added manufacturing services since 1994.
The company also completed the acquisition of Trident Manufacturing Inc. last quarter, which generated revenues of approximately $3 million in 2012 targeting the industrial, aerospace, military, instrumentation, and medical markets since 2005. Management sees the acquisition as reinforcing its strategy to provide a low-cost, scalable model for small- to mid-sized OEMs that allows them to manufacture in the U.S. and avoid the costs of offshoring.
Last year, the company reported revenues that increased 9% to $4.96 million, operating income of $71,500, and EBITDA of $114,726, with gross profit margins of approximately 28%. These results were driven by the addition of six new customers that further diversified its revenues, while expanding its national footprint. In addition, a shifting of its capitalization structure could help improve gross profit margins and expand revenues in 2013.
Potentially Undervalued Stock
For potential investors, Probe Manufacturing also appears to be undervalued based on several metrics. The company's price-to-book ratio stands at just 0.4x compared to a 1.6x industry average and the S&P 500's 2.3x average, according to Morningstar's estimates. And in FY2012, the firm's price-to-sales ratio also stood at 0.3x that's on par with the industry average, but below the S&P 500's 1.5x average and its own historical 0.5x average.
The company's net loss of $(116,373) during FY2012 was largely due to interest expenses associated with a line of credit that increased from $51,000 to $190,000, as well as increased inventory reserves and allowances for doubtful accounts of about $75,000. With the entire industry experiencing a slowdown that year, the results suggested that the firm has not only shown top-line growth but also hidden bottom-line growth last year.
Potential Investment Opportunity
Probe Manufacturing offers investors an interesting play in the U.S. onshore manufacturing movement, as Probe's strengths include: (i) significant management expertise; (ii) low overhead and cost structures; (iii) sophisticated and high tech systems; (iv) and global relationships, with a domestic customer-centric program management team. These attributes set it apart from many other similar manufacturers and have been key contributors to its outperformance in FY2012.
By cleaning up its cap structure and scaling its business into lower cost U.S. regions, the company has a number of key catalysts moving into FY2013. The stock also appears to be trading at a relatively cheap valuation compared to its peers, while FY2012 results suggest that it may be closing in on breakeven performance on a net income basis. Taking into account these factors, investors may want to consider adding this company to a diversified portfolio.
- Company Website
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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