UEIC - Universal Electronics: Hope Springs Eternal (Technical Analysis)

2023-09-22 09:50:25 ET

Summary

• Universal Electronics Inc. is a potential value play in the consumer electronics industry.
• The stock has experienced a significant decline in share price, but the long-term MACD indicator suggests a potential turnaround.
• Consolidation and bullish buying volume trends indicate a possible breakout in the near term, supported by insider buying and better-than-expected earnings.

Intro

Universal Electronics Inc. ( UEIC ) operates in the consumer electronics industry where through its technology it offers products to the climate control, security, & home automation markets to name but a few. The stock came across our desk as a potential ultra-oversold value play due to the stock's encouraging technicals and how the company looks like it is about to take advantage of a fresh growth area as we learn below.

However, if we first pull up a long-term chart of the stock, we see that shares of UEIC topped out in 2016 but the real acceleration of the share price to the downside began after shares topped out in March 2021. Shares have lost approximately 85% of their value which means shares are currently trading as low as their 2002 lows as we see below.

The encouraging trend however on the long-term chart of UEIC is that the stock's long-term MACD has stooped to an oversold level that we have never seen in this sock. What does this mean? Well, the MACD indicator is particularly noteworthy on long-term charts not just because of the amount of information it can digest but also because of the dual function of the indicator (Momentum and trend). Furthermore, although a long-term buy signal has not been triggered yet on the MACD through a bullish crossover, we do see that the stock's current downtrend is weakening (as confirmed through the rising histogram).

If we go to a more near-term chart, we can see evidence of why the downturn has been weakening as shares have been consolidating for the best part of six months now. Buying volume trends have been bullish during this period so it will be interesting to see if shares can break out above both their downcycle trend-line as well as the OBV line (On balance volume) over the near term. The reacceleration o f insider buying o ver the past couple of months is another encouraging trend, demonstrating that higher prices may be coming shortly in UEIC.

Q2 Earnings Beat

Although Universal Electronics once more reported negative earnings in its recent second quarter, the reported figure of -$0.06 per share was much better than consensus was expecting (EPS of -$0.19). Although the market (share-price action) acts as a forward-looking predictive mechanism, company insiders obviously see significant value in UEIC at its current share price, most likely due to elevated activity (design wins) taking place behind the scenes.

Firstly on the front-end (sales), the long-term chart above illustrates UEIC's strong growth curve between 1997 & 2016 where the home entertainment market was the key factor in this cycle. The next growth area for Universal is the 'Connected Home Market' where users have the capability to control the likes of their HVAC & security devices from a central control point. The growth rate of this market (up to 10% CAGR) is bullish for Universal as there should be plenty of 'overlap between the company's home entertainment technology and this new growth market.

Furthermore, with oil prices continuing to go from strength to strength (which will result in higher inflation over a longer time period), this trend will only increase the demand for modern energy management systems over time. The key here is that multiple devices will be able to communicate with each other efficiently in order to save energy (Interoperability).

This is why we are not surprised to see that Universal has already secured over 30 design wins with manufacturers where security, home automation HVAC wins should only increase over time. Cost savings are also expected to be significant in upcoming years due to how Universal has improved its footprint optimization in recent times. By focusing on more efficient streamlined manufacturing facilities, management believes it will be able to save up to $18 million in costs on a yearly basis. What essentially we are looking at here is economies of scale and because Universal's new growth areas (home automation, security, etc.) carry a higher price tag concerning their products over their video-related counterparts, not as much manufacturing space is needed at present. Therefore, a reduced manufacturing footprint along with the flexibility to ramp up production if demand were to spike is precisely the right course of action for Universal. Lower costs will protect the balance sheet over time and thus give the company time to really make inroads into the 'Connected Home Market space.

Risks

Being a micro-cap stock with under-average volume means that we can get significant swings in the share price on either aggressive buying or selling. In fact, Universal's present implied volatility comes in at almost 60% for October. This means shares are expected to move in a range of either plus or minus 60% over the next 12 months. Now, value investors may be enticed by the setup here given shares of UEIC trade with an ultra-low forward sales multiple of 0.27. Be this as it may, shares were also extremely cheap before the stock began to undergo its consolidation but lower lows continued to the downside. Therefore, not to take anything for granted, it is best to wait for overhead resistance to be taken out first before scaling into long positions here.

Conclusion

To sum up, Universal Electronics' share price has been decimated over the past 30 months or so. Given how earnings have been trending and the potential the company has in the Connected Home Market, we believe shares could be close to a bottom here. Let's see what Q3 brings. We look forward to continued coverage.

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