Eltek -- Worth Getting to Know (ELTK)

Includes: ELTK, SILC, TISA
by: Shlomo Greenberg

Eltek Ltd. (Nasdaq: ELTK) is a fairly straightforward company, and one of Israel’s oldest technology companies, founded in 1970. The company develops, manufactures and markets printed circuit boards [PCBs]; its uniqueness lies in its production of customized PCBs. Many semiconductor and processor companies use Eltek PCBs, from Given Imaging Ltd. (Nasdaq: GIVN) to Israel Aircraft Industries Ltd.. Eltek has a lot of know-how, much of which was accumulated during years developing projects for Israel’s defense establishment.

Eltek presents two major problems for its shareholders. The first problem is the provision of information to investors. The second problem is derived from the first; the company is not valued as it should be. An investor wanting to know about Eltek president and CEO Arieh Reichart has to be satisfied with his name only, because the company’s website has no biographies of its officers.

By chance, I know the man, but the market, especially investment mangers, does not, because Eltek’s website does not have his resume. The company’s owners are not listed in any easily accessible place. For an investor seeking quality, this creates a problem in taking the company seriously.

It is true that the market knows that Merhav MNF Ltd., owned by Yossi (Joseph) Maiman, is a shareholder in Eltek? But why isn't this information transparently and readily available?

Eltek is one of a group of small-cap companies that I believe have potential. Companies such as Mind CTI Ltd. (Nasdaq: MNDO), Silicom Ltd. (Nasdaq: SILC), and Top Image Systems Ltd. (Nasdaq: TISA) represent great potential, and I’ve been monitoring them since they went public. Eltek went public in 1997, in an IPO led by underwriter Josephtal Lyon & Ross Inc. Like all technology stocks, Eltek peaked in early 2000, reaching almost $9. The stock subsequently fell to $0.28 in late 2002. Again, like all technology stocks, it climbed back, reaching $2.80 in March 2004, only to slide back to $0.80 by the end of that year.

When in early 2002, Wall Street believed there was little hope for companies of this kind, Eltek went out and bought Main Street German PCB developer and manufacturer Kubatronik Leiterplatten GmbH. There is a lot synergy between the two companies. More importantly, Kubatronik has reputation, seniority and connections in Germany and throughout Europe. Although at the time of the acquisition most Israeli and European technology were in a state of shock following the Wall Street collapse, Reichart spotted the opportunity and bought the German company.

Eltek has made slow progress since the acquisition, building a reputation and entering new markets. The company’s results for the first quarter of 2006 follow several increasingly strong quarters in its business. The important thing in my opinion is that Eltek has entered niches with great potential, such as medical devices and specialized military markets. The truth is that I saw this company’s potential even before the boom and bust of 2000. My assumption was that under the management of an experienced man like Reichart, this company could achieve much higher sales and profits. The crisis delayed rapid growth, but the growth of the late 1990s seems to have resumed.

Another problem Eltek has vis-a-vis potential investors is that the company is not covered by any serious analysts. The company had seven million shares outstanding at the end of the first quarter, giving it a market cap of $34 million, which definitely does not reflect its business potential. Eltek is too small at this time to interest investment institutions, but it would do no harm for the company to get to meet US institutions and to initiate a relationship with them, so that they will know who this company is.

None of the small-cap companies mentioned here rouse interest from the Street, except when they publish their financials, and only if those financials are unexpectedly good or bad. This is a clear sign of short term speculation in the stocks, which causes many ordinary investors to abandon them. In the case of Eltek, Mind CTI, Silicom, and Top Image, the trend has been clear for several quarters. But what happens in practice? Every time the quarterly financial reports are good, the companies’ shares skyrocket, only to come back down until the next quarter.