Is This Durable Goods Stock on the Rebound?
Kevin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A maker of pre-programmed universal wireless control products emphasizing ease of use, Universal Electronics (NASDAQ: UEIC) also produces audio-visual accessories for home entertainment systems. According to its Chairman and CEO, UEIC supplies approximately one-third of all remote controls shipped annually on the planet. The stock is closer to its 52-week low now sitting at the mid-$14 range. There was a drop of over 30% in Q2 despite an EPS and incomes that were solid and in-line with expectations.
Looking over the last year and half reveals a drop in valuation from just over $30 a share to the current price in the $14 range. At less than half of its recent high without a solid set of reasons, a stock becomes a good move. UEIC in the latest quarter had $24.31 million in total cash and $14.20 million in total debt making it one of the four small-cap stocks in the electronic equipment industry with the most cash.
This stands in contrast to some analysis expressing concerns of UEIC’s CCC, or cash conversion cycle. Without getting off course here, CCC measures how quickly a company converts cash to product and back to cash. While some say that the CCC for UEIC is some 5 to 10 days slower than the average, that average isn’t specifically for the industry in which UEIC operates. Since CCC is used as an indicator for whether or not a company will need to borrow, it seems currently irrelevant since UEIC is one of the most liquid companies in its sector.
While there has been a slight decrease in year to year comparisons of the Q2 results, the company’s expectations were in line with results meaning that investors can have some faith in the expectations for the next quarter.
There isn’t a lot of direct competition. Privately held Universal Remote Control is currently being sued by UEIC for patent infringement. Here are some companies that make a wide variety of products have some product line overlap with UEIC. Emerson Electric Co. (NYSE: EMR) has a diversified line of products and services with some competing items as does Harmon International Industries (NYSE: HAR). But neither of these companies would call remotes and electronic control devices their “bread and butter” so their current success isn’t a detractor for UEIC.
UEIC also makes devices for video games which places them into product overlap competition with Electronic Arts (NASDAQ: EA) and Activision Blizzard (NASDAQ: ATVI). While both are strong companies, their focus is on games and consoles with controllers not being the development focus.
How hard of a sell does one have to make to convince an investor that a company with a P/E below 10 and a one third share of the global market for its primary product is a smart move? Hopefully not too hard. But here’s the sell anyways.
The valuation is close to the low-end of its 52 week range and has an RSI below 30, the commonly-acknowledged threshold for indicating that a stock is oversold. Compare that to the RSI reading of the S&P 500 ETF (SPY) at 53.0. For investors that like to be fearful when others are greedy and greedy when others are fearful, the oversold stock of UEIC offers a good opportunity. When too many investors have left for no good reason, there is opportunity.
No analysts or commentators seem to be able to offer a justification for a stock that was over $30 to be less than half of that right now. Nothing catastrophic has happened to the company or the industry and performance is solid with expectations (that have been reliable to date) of a Q3 performance that will equal or exceed last year’s Q3 results.
This all makes UEIC a solid play. The long term outlook is good with the P/E and valuation in general is too low. The company is also one of the sector’s cash-wealthiest and showing steady performance. It’s easy to like UEIC and most of the Fools in CAPS do, so don’t miss out.
thedeswolf has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and Emerson Electric Co.. 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.If you have questions about this post or the Fool’s blog network, click here for information.