A Vastly Growing Industry, Earnings CAGR Of 39% And Yet A P/E Of Just 10: Payton Planar

Nov. 01, 2019 10:01 AM ETJELCF, DHI, ARW, MEI, LGEAF5 Comments
Tristan De Blick profile picture
Tristan De Blick
633 Followers

Summary

  • Transformer Market is expected to grow by more than 10% per year until at least 2022.
  • In the Transformers market space, the Planar Transformers are gaining market size, thus growing significantly faster than 10%.
  • Payton Planar has therefore seen its earnings grow by 39% annualy over the last five years.
  • Current slowdown in the electronics industry have made the stock even more affordable, trading at a P/E of just 10.

One proven investment strategy is to buy market leaders in growing markets. However, most often such companies come at steep valuations. In this article, I present a market leader that is trading at a P/E of less than 10, operating in a market that is growing by more than 10% a year.

If you wish to keep updated about European top-picks, you can follow me.

Transformer Market

Technicalities

"Invest in what you know" is a commonly heard investment quote. So, let's get to know the technicalities of transformers before investing in it, shall we?

A transformer is a passive electrical device that transfers electrical energy between two or more circuits. It allows for increasing or decreasing the alternating voltages in electric power applications. This lets different machines with different voltage needs run on the same power source.

There are different kinds of transformers. One fairly new form are 'planar transformers'. Without going too much in the details, one should know that these kinds of transformers are typically 30% of the volume and weight of a traditional wire-wound transformer. They are more efficient as they have less 'leakage'.

5kW to 20kW Planar Transformers

Image source: Payton Planar's 5kW to 20kW planar transformer

Industry Applications

There is a whole range of industries that make use of transformers: Automotive, Aviation, Military, Medical, Telecommunications, Electronics, Industrial, Power, Appliances, Transportation, Alternative/Solar Energy, Lighting/LED, and others.

Market Growth

Following multiple research reports, the Transformer Market is expected to grow by more than 10% on a yearly basis, until 2022. Mind: this is the whole market. As planar transformers are gaining market share in the transformer market, the planar transformer market is expected to grow by significantly more than 10% a year.

How to play into this trend?

Traditionally, companies that are operating in such a vastly growing market, come at a price. However, there is a pure-play option (thus a company that is only active in the transformer market and has no other activities) which is more than affordable: Payton Planar Magnetics.

Payton Planar - The Company

The stock trades on both the Israeli stock exchange ((IT:PAYT) and the Brussels stock exchange (EBR:PAY).

The company is the "global leader of Planar Magnetics Technology with more than 25 years of research and development experience". As stated earlier, it is a pure-play option in the Planar Transformers market.

Payton Planar - Financials

in Million USD 2014 2015 2016 2017 2018
Sales 25.327 27.372 32.354 33.043 45.623
EBIT 2.629 4.095 5.217 6.526 13.434
Earnings 2.153 3.327 4.253 5.544 11.361

Source: author's own work

As one can clearly see, the company has seen stellar growth. Revenue has grown by 80%, while earnings have grown at a Compound Annual Growth Rate of 39%! This large growth in earnings is thanks to the increase in operating margin by multiple percentage points per year.

The increase in operating margin can be explained by the managerial discipline of Payton. Even though sales have skyrocketed, management is constantly cutting costs through efficiencies.

When looking deeper into the numbers, we see that there is one source of costs that is steadily going up each year: development costs. This is a good sign, as it indicates that management continues to invest in the business, as "Payton’s R&D strategy is aimed at maintaining the leadership of the Planar Technology" (quoted from financial report 2018).

2019

This rapid increase has come to an end in 2019, thus far. In fact, sales dropped by as much as 18% year over year. This decrease resulted mainly from the global economy and electronics industry slowdown, and should thus be temporary.

Even though sales dropped and the company has a large portion of fixed costs (which is why earnings have gone up almost 500% over the last five years, while sales only went up by 80%), the operating margin did not decrease! This really shows management's strong operational efficiency, as they were able to cut costs, once more.

The net profit over the first half of 2019 is now just 4.028 million dollars, down 22% from 5.195 million dollars over the first half of 2018.

Outlook

The backlog currently stands at around 15 million dollars, compared to 16 million dollars last year. The expected drop in sales year over year will thus be just around 7%. This is a significant increase compared to the first half of 2019 and is a sign that this period indeed is no more than a temporary slump.

Balance Sheet

The company only bears 7.7 million dollars of debt, while having no less than 39 million dollars worth of cash and cash equivalents on the balance sheet. Payton is financially an extremely healthy company.

Valuation

While the stock price went up by no less than 500% over 2014-2018, it has since then come down by 15%. Despite this large jump in the share price, Payton remains to be valued very cheaply.

EV/EBIT

The Enterprise Value stands at 78 million dollars. Over the trailing twelve months, an EBIT of 11.810 million dollars has been made. The EV/EBIT ratio thus stands at just 6.6!

Even when accounting for a decrease in the certain half of 2019, by around 7-10%, this ratio stands at just 7.

P/E

In the first half of 2019, 0.23 dollars in earnings have been made. In the second half of 2018, the company made 0.35 dollars in earnings. The trailing Earnings Per Share (EPS) would thus be 0.58. At a current price of 6.15, the company trades at a P/E of 10.6.

Conclusion

The transformers market is set to increase by more than 10% per year, until at least 2022. In this market, the Planar Transformers are gaining market share. The global leader in Planar Transformers, Payton Planar, has seen its profits grow by 39% per year over the last five years.

However, the first half of 2019 has been different, as there has been an electronics industry slowdown. Sales dropped 18%, yet management was able to keep its strong operating margins intact through managerial discipline and efficiencies.

The second half of 2019 is looking better, as sales are expected to only drop by 7% compared to last year (which in itself is already 11% better than the first half of 2019). This signals that the downturn really is just temporary.

Investors are able to get a piece of this vastly growing business for a price of just 10 times earnings, which is a total bargain. At the same time, the company pays out an increasing dividend, currently standing at 0.30 dollars per share, or 4.8% gross yield.

If you wish to keep updated about Payton Planar, you can follow me!

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

Tristan De Blick profile picture
633 Followers
A Belgian Ph.D. researcher in Entrepreneurial Finance with a special interest in high-growth small caps, while focussing on low risk through portfolio strategies. Call writing and long/shorts, that is.

Disclosure: I am/we are long Payton. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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