Growing Electrical Component Firms

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Given the range of industries served by electrical equipment providers, if an entity has a strong presence in one growth end market it can mitigate the effect of other struggling businesses and drive profit gains. Telecom-related sectors, including networking products and wireless communications may well support earnings improvements at certain companies. Additionally, when one industry player fills a niche by specializing in a particular product, margins can be healthy, supporting income, and investors can potentially be rewarded. Here are a few I’ve discovered:

Belden (NYSE: BDC)

Belden manufactures cable, connectivity, and networking products, catering to industrial, enterprise, broadcast, and consumer-based customers. The key segment spurring profit advances has been networking products. In fact, that unit, contributing about one-quarter of revenues, grew its top line 55% in the latest December quarter, as compared with the prior-year period. Notably, much of this was through growth by acquisition, as Belden acquired Miranda Technologies, a broadcast infrastructure company, in July 2012. In addition, it improved the profitability of its portfolio, divesting consumer electronics assets in China, as well as its Thermax and Raydex businesses.

This year, Belden is well-situated to boost earnings substantially. In fact, management is guiding toward a share-net gain of 23% to 32%, to between $3.44 and $3.69. It cited favorable secular trends and heightened market share, along with cost-cutting initiatives, namely Market Delivery System and Lean Enterprise. The product focus will be signal transmission solutions, a product category that should support expected growth, despite soft conditions in certain end markets.

BDC shares are fairly priced, based on the forward P/E ratio and may well thus have upside, as profits continue to swell.

TESSCO Technologies (NASDAQ: TESS)

TESSCO is a company firmly entrenched in the wireless broadband market, one where spending growth is apt to persist as demand for services rises and the use of data and video services continues to expand. Its core Base station infrastructure unit is experiencing rapid profit gains and should continue to be a boon to earnings.

Be aware that TESSCO’s top line will probably decrease in the near term, as its largest customer winds down the exiting of its third-party logistics operation with Belden. Positively, though, those revenues were low-margined. In all, a sharp decrease in Tier 1 carrier revenues is apt to hamper revenues but lift profitability across the company. On that note, its other customer contingencies, including public systems operators, Tier 2/3 carriers and others are contributing a growing proportion of sales.

TESS shares have been prone to volatility but have upside in light of the earnings trend.

Daktronics (NASDAQ: DAKT)

This electronic display maker is interesting in the way it has expanded into higher-growth markets. While sales of its commercial-related billboards are on the decline, it is generating growth in revenues from Live Events customers, and making strides quickly in the Schools & Theatres, Transportation, and International sectors. All told, sales are increasing at a double-digit percentage rate, and margins are widening enormously.

The demand pipeline looks solid, based on ongoing projects and the potential for further such deals. For example, travelers may see Daktronics’ products on the New Jersey Turnpike and at the Los Angeles Airport, while sports fans would get a taste at Tampa Bay Lightning games or the Barclays Center in Brooklyn, NY. Internationally, Daktronics has recently sold to soccer stadiums in Brazil.

Given what I view as a favorable environment at present, along with efforts to enhance margins, the bottom line upturn is likely to persist. Accordingly, DAKT stock has additional upside at its current quotation. Being that it is a growth stock, the higher P/E valuation than other electronics firms should not cause investors to shy away.

Rockwell Automation (NYSE: ROK)

After an unimpressive December quarter, this company might well be poised to gain steam. Management is forecasting a strong six-month span ending June 30 in light of conducive economic trends and its higher backlog. The geographic markets where it has seen slowdowns, particularly Asia, are apt to bounce back. An acceleration of bottom-line advances appears on tap.

The company has two operating segments: Architecture & Software and Control Products & Solutions. The solutions business is specifically from where the backlog turnaround has occurred. Nevertheless, Rockwell has consistently posted earnings gains, rendering the last two quarters as anomalies. It also uses its cash to reward shareholders with a 2.1% dividend and share repurchases, as well as making small acquisitions.

ROK shares are therefore appealing at this juncture as an addition to almost any portfolio.

Summary

These are just a handful of the many companies that comprise the electrical products industry. Possibly I have saved some of the time of sifting through the various entities. End market trends are crucial to studying the residing firms. They all are now pursuing growth overseas and many are riding the acquisition wave.

 


dctotal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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