Why IEC Electronics Is a Bargain

Includes: GE, GR, IEC, LMT
by: The GeoTeam

IEC Electronics Corp (NYSEMKT:IEC) provides contract electronic manufacturing services to advanced companies primarily in the military and aerospace, medical, industrial and computing sectors. In addition to procurement and manufacturing activities IEC performs value added services such as initial testing of circuit boards and trouble shooting to ensure that its clients' processes function properly during pre and post market applications.

Data as of 2/09/2010, included:

  • Price = $4.99

  • Trailing EPS = $0.52

  • Fully-Taxed Trailing EPS = $0.32

  • Fully-Taxed Implied 2010 EPS based on 2010 Net Income Company Guidance = $0.46

  • P/E based on Fully-Taxed Trailing EPS = 15.59

Reasons for Optimism

  1. IEC meets 8 out of 10 requirements to qualify as a bargain.

    September Fiscal Year Requirement Comments
    Yes Recent 52-week High(generally within 3 months) Must Reach $7.69
    Yes 30% EPS Growth Rate
    • Full year 2010 net income guidance implies an EPS growth rate of 43.75%
    Yes 10% Revenue Growth
    • Full year 2010 guidance implies a revenue growth rate of 41.57%
    Yes Strong Balance Sheet/Cash Flow As of 2009 10K
    Yes Current Ratio is at least 2:1 2.5:1
    Yes Debt to Equity Ratio less than 20% 5.7%
    Yes Positive Cash Flow

    $ 3.0 Million

    No Return on Equity is at least 15% 23.29%
    Yes Minimum Pre-tax Operating Margins of 8% 7.08% Per full year 2010 guidance
    Yes Preferably Under 50 Million Shares 9.55 Million shares as of 2010 10K
    Yes High Insider Ownership (generally greater than 15%) >15%
    No Limited Institutional Ownership (generally less than 20%) <20%
    Yes P/E Divided by Growth Rate (PEG Ratio) is Less Than 1. 0.35
  2. The January 2010 Investor Presentation contains very bullish commentary:

    • The company claims that the "wind is at its back" due to increased outsourcing within select markets and today's elevated trend of customers who will be dependent upon IEC for complex jobs.

    • IEC has a solid customer base which includes Gen Electric Co (NYSE:GE), Lockheed Martin Cp (NYSE:LMT), and Goodrich Corporation (NYSE:GR).

    • Margins have been rising steadily since its 2007 4th quarter.

    • The company has an acquisition strategy that focuses on new market penetration in high margin sectors.

    • By 2012, there is a $150 million revenue goal.

    • IEC's strategy is "to cultivate strong manufacturing partnerships with original equipment manufacturers, or OEM's, in the industrial, communications, medical, homeland security, military and aerospace industries that require high reliability final assemblies".

  3. IEC recently announced the completion of an acquisition that will add $25 million to revenues and be accretive to earnings per share. It is notable that no stock was issued with this acquisition, a clear sign that management is cognizant of shareholder interest.
  4. The company boasted consistent growth in sales and earnings, even through the global recession.

    Full Year 2009 Full Year 2008 Full Year 2007
    Revenue $67.8 M $51.1 M $40.9 M
    EPS $0.32 $0.11 $0.04
  5. Company guidance implies this growth trend will continue.

    • Sales are forecast to increase 41.57% to $96 million
    • Pre-tax income is forecast to increase 44.68% to $6.8 million.

Potential Valuation Scenarios if the company can achieve its growth objectives

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

P/E 20 * $0.32 = $6.40
P/E 25 * $0.32 = $8.00

Short-term Potential value based on 2009 fully taxed adjusted Implied EPS Guidance:

P/E 15 * $0.46= $6.90

These 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.

Disclosure: Long IEC, No Positions in GE, LMT and GR