Cheap Technology With a Built-In Price Floor
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Despite the recent 27% run-up in price since the first trading week of this year, Vishay (NYSE: VSH) shares are still down almost 38% from their late-April 2011 high. As a leading manufacturer and supplier of discrete semiconductors and passive electronic components, VSH and close competitors have experienced most of the negative economic downturn effects to which the industry is prone. Average quarterly revenues during trough periods (Q4 2008 - Q3 2009) fell nearly 30% from the two years preceding the downturn, and despite a 101% sales increase from Q3 2009 to Q3 2010, sales have resumed a dampened trend throughout the first three quarters of fiscal year 2011.
The decreasing level of volume, which led to the corporation coming short of market expectations, is the primary driver of the price fall since early 2011. Trading at such an inexpensive market valuation, however, VSH shares now appear to be both undervalued on an absolute and relative peer basis. Despite the failing fundamentals that the low market valuation may suggest, the company is actually improving several key business metrics and outperforming its historical operating results.
Note: EV/EBITDA and P/E ratios on a TTM basis.
Average revenues and gross margins over the last four quarter period remain 27.5% and 500 basis points, respectively, over their past seven year averages. Likewise, due to timely cuts in headcount and a strict adaptation of manufacturing capacity to sellable volume, inventory levels have not skyrocketed despite the reduced sales volume. The fact that gross margins and inventory turnover levels were maintained throughout the downturn prove the effectiveness of the firm's restructuring initiatives. This long-lived improvement in the business should almost act as a multiplier effect when (and if) volume ramps up to full capacity. Average inventory turn levels over the past four quarters are more than 18% greater than their quarterly average since Q1 2005.
As happens with most serial acquirers, VSH's $1.43 billion acquisition spree in the decade preceding the corporation's large 2008 goodwill write-off only acted to minimize its overall return on core assets. Return on net operating assets (RNOA - defined as post-tax operating income divided by [operating assets - operating liabilities]) averaged a very minimal 4.4% between 1999 and 2007. It was only after 2008's $1.72 billion write-off, and after sales volume was recovered after 2009's downturn, that the corporation showed a meaningful return on core assets.
The 32.2% RNOA in 2010 was slightly diminished in the first three quarters of 2011 due to the rather was Q3 2011 period. The 20.1% return generated on core assets in these three quarters implies a 25% - 28% four quarter run, assuming the corporation continues its average performance. What should be most disconcerting to current and potential VSH investors is if the corporation continues to follow its growth-by-acquisition strategy that has not been proven to unlock meaningful shareholder value. The large write-off in 2008, as well as the spin-off of Vishay Precision Group (NYSE: VPG), shows that the acquisitions do not necessarily create maximum value in unison.
With a cash/share-to-price/share ratio of 53% -- nearly 76% larger than the average ratio for Fairchild Semiconductor (NYSE: FCS), ONNN Semiconductor (NASDAQ: ONNN), International Rectifier (NYSE: IRF), AVX (NYSE: AVX), and Kemet (NYSE: KEM) -- VSH undoubtedly has the liquidity to sustain further potential revenue decreases and still maintain debt servicing obligations over the mid-term. Whether this liquidity disparity between VSH and its competitors is viewed as further evidence of the corporation's undervaluation or as a heightened ability to make accretive acquisitions, VSH should be a suitable value pick for a long-term investment horizon. The emphasis on accretive should not be underappreciated, as anything less would simply shift the corporation from its currently impressive return on core assets to its rather mediocre pre-recession performance.
It is positive to note that although company management has not been purchasing many shares at their current low valuations, value-investing guru Howard Marks and chairman of Oaktree Capital has acquired nearly 2.75 million shares at around $12.10/share. The backing of a stock by a renowned value-conscious investor should never be considered a bad thing.
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