- Adverse foreign currency translations served as a drag on Littelfuse’s reported growth.
- An expanding U.S. Economy offset by the mining sector contributed to Littelfuse’s results.
- Littelfuse sports a rock solid balance sheet with plenty of cash and a small amount of long-term debt.
On Feb. 4, circuit protection company Littelfuse (NASDAQ: NASDAQ:LFUS) came out with its FY 2014 earnings announcement. The company had an excellent year in my opinion. However, adverse foreign currency translations caused the company to lose the Wall Street expectations game on the EPS front sending the shares down roughly 8% the day of the announcement. Let's take a look to see how the company is doing.
Revenue and profitability expanded
In 2014, Littelfuse saw its revenue, net income and free cash flow expand 12%, 12% and 47% respectively year-over-year. An expanding U.S. economy contributed, at least in part, to organic growth of 5%. It's always good to see some growth coming from increased demand for a company's products. However, the company also purchased a huge chunk of its growth through acquisitions which accounted for 60% of Littelfuse's overall growth in revenue. Weaknesses in the mining market within the electrical segment served as a drag on revenue growth. An 8% reduction in capital expenditures contributed to the free cash flow expansion.
Excellent balance sheet
Littelfuse possesses an excellent balance sheet. The company ended the year with approximately $302 million in cash and short-term investments equating to an incredible 42% of stockholder's equity. I like to see companies harbor cash and liquid investments equating to 20% or more of stockholder's equity to get them through rough times.
The company is also light on long-term debt. This represents a good thing because long-term debt creates interest which chokes out profitability and cash flow. I like to see long-term debt amounting to 50% or less of stockholder's equity. At the end of last year Littelfuse's long-term debt equated to a miniscule 14.7% of stockholder's equity. In 2014, operating income exceeded interest expense by a conservative 27 times earnings. The rule of thumb for safety lies at five times or more.
Small but sustainable dividend
Littelfuse pays a small but sustainable dividend. I always measure the dividend sustainability of a company by comparing how much it pays vs. its free cash flow. I prefer that a company pays out less than 50% of its free cash flow dividends while retaining the rest for reinvestment back into the business. Last year, Littelfuse paid out a minor 18% of its free cash flow in dividends. Currently the company pays its shareholders $1 per share per year translating into a yield of 1%.
Littelfuse's management acknowledges strong headwinds from adverse foreign currency translations. Personally I prefer those types of headwinds vs. something more fundamental like lower demand for its products. Of course it may continue to struggle with the electrical segment due to weaknesses in the mining sector which represents only a small part of its business. Like any prudent company it plans on initiating price increases, keeping an eye on costs and moving faster on restructuring efforts, according to the earnings announcement.
I love the company's prospects combined with its rock solid balance sheet. Littelfuse is trading at a P/E ratio of 20 vs. 18 for the S&P 500 meaning that it's not exorbitantly overvalued. On a forward basis this company only trades at a P/E ratio of 15 vs. 17 for the S&P 500. This company definitely deserves a second look.
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