Royce & Associates Owns Over 10% of This Stock

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Royce & Associates, a fund managed by Chuck Royce which tends to prefer investing in small-cap and mid-cap companies, has reported that it owns 8.3 million shares of Molex (NASDAQ: MOLX), a $5 billion market cap manufacturer of electronics components. The 13G filed with the SEC has this figure as 10.3% of the total shares outstanding. See more of Royce's stock picks. Our database of 13F filings shows that at the beginning of October Royce had owned 7.6 million shares of the stock, so we know that at least some of these shares have been bought in the last three months. The stock is up 17% in the last year.

The first quarter of Molex’s fiscal year ended in September, with the company reporting that revenue had dipped 2% from the same period in the fiscal quarter ending September 2011. With expenses showing little change, Molex Incorporated had most of that decline in revenue drop into operating income. As a result net income was down 11% from a year earlier. Much of the downturn in business is due to the Connector segment, which is responsible for over two-thirds of Molex’s revenue; the Custom & Electrical division saw a small rise in revenue and a small decline in operating income.

Molex is valued at 19 times trailing earnings in the market, a multiple at which we’d expect to see moderate and sustainable growth in order to consider a stock a potential value play. Wall Street analyst expectations are for earnings growth in the next year, as shown by the fact that the P/E is only 16 when we consider consensus earnings for the fiscal year ending in June 2014, but of course the sell-side may be being a bit bullish and we’re certainly not as confident that Molex will reverse the recent performance of its business.

Edgar Wachenheim’s Greenhaven Associates owned 1.3 million shares of Molex at the end of September, roughly unchanged from what it had owned three months earlier (find more stocks that Wachenheim owned). Ascend Capital, managed by Malcolm Fairbairn, and David Harding’s Winton Capital Management were two other hedge funds reporting substantial positions in the stock.

The company’s peers include diversified electronics companies Amphenol (NYSE: APH), TE Connectivity (NYSE: TEL), Methode Electronics (NYSE: MEI), and AVX (NYSE: AVX). With the exception of AVX, these comparable companies reported earnings growth in their most recent quarter compared to the same period in the previous year (though TE Connectivity did report lower revenues). TE Connectivity and Methode also have the advantage of trading at a discount to Molex in terms of their trailing earnings, with P/Es of 12 and 15 respectively on that basis.

Amphenol is priced about even with Molex, carrying a trailing P/E of 21, but it is a larger company and it experienced modest improvements on top and bottom lines in the third quarter of 2012 compared to the same period in 2011. Its valuation looks a bit high to us, and if an investor agrees with that analysis it’s hard to see why they would buy a slightly cheaper stock that is attached to a poorer performing business. Methode might be a good value, but it has a fairly low market cap at about $380 million and that may be unattractive despite what are some quite low multiples and a decent revenue growth rate.

We don’t like Royce’s decision to buy more Molex stock. The company doesn’t seem to be executing well, particularly considering that the stock trades at a multiple that should generally correspond with sustainable growth. Industry peers don’t look like screaming buys either but their values are in some cases comparable or lower and in these cases there is at least some sales growth.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool has no positions in the stocks mentioned above. 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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