VPG - Vishay Precision Group: Recent Strength Warrants Upside

2023-03-07 17:35:36 ET

Summary

• Vishay Precision Group has done well over the past couple of years, with sales, profits, and cash flows finally rising after years of mixed results.
• The near-term outlook for the company also looks positive based on sales expectations for the first quarter of this year.
• Shares are also on the cheap side of the spectrum and, as a result, likely have some upside potential.

The past 200 years, and especially in the past 50, have been defined by the technologies that individuals, companies, and governments have developed and put into action. For instance, the ability to use technology to offer precise measurements of various things or to sense various things has proven instrumental for a wide portion of the population. Though perhaps no longer considered as cutting edge as it was in the past, this type of technology is highly relevant today. And one company that operates in this space that investors should be aware of is Vishay Precision Group ( VPG ). For the past couple of years now, the company has done well to grow both its top and bottom lines. Though prior to that point, its fundamentals did seem to be stuck in a rather narrow range. This kind of inconsistent track record typically does warrant some discount relative to similar companies. But given how cheap shares are, I do think that the company offers investors some upside potential from here.

A niche technology provider

According to the management team at Vishay Precision Group, the company serves as a global diversified firm that's focused on precision measurement and sensing technologies that helped to empower its customers by bridging the gap between the physical world and the digital one. Through its specialized sensors, weighing solutions, and measurement solutions, the company is able to take the physical characteristics of something that its customers are working with and transform that into data that can provide insight, ideally actionable insight, that can prove valuable for all parties involved.

To best understand the company, we should dig into the individual segments that it operates. The first of these is the Sensors segment. Through this, the company produces precision resistor and strain gage products. For context, precision resistors are considered the most precise and stable type of resistors available on the market. And they are used in all forms of electronic circuitry to adjust and regulate levels of voltage and current. The primary customers for these types of products include firms and governments in the avionics and military industries, space communications, fiber optics, industrial automation, electric vehicle battery management infrastructure, and more. Meanwhile, the strain gage products the company sells include advanced resistive sensors that are attached to the surface of an object in order to determine the surface strain caused by any miscellaneous applied force. Customers in the aviation, military, and space markets, as well as infrastructure and construction markets, will utilize these technologies in stress analyses. This segment was responsible for 42% of the company's revenue and for 51.3% of its profits during the 2022 fiscal year.

Next in line, we have the Weighing Solutions segment. This unit consists of a number of subsidiaries that the company owns that produce, amongst other things, transducers, vehicle weighing and load monitoring systems for commercial vehicle types, load cells and instrumentation for weighing and force control/measurement, and more. According to management, this segment was responsible for 34.7% of the firm's revenue and for 26.1% of its profits last year. Under the Measurement Systems segment, meanwhile, the company offers highly specialized systems for steel production, materials development, and safety testing. Examples here include thermal mechanical simulation systems for metallurgical research, sensors and systems for the steel and aluminum industries, high-performance signal conditioning, data acquisition, and control systems, and data acquisition systems and sensors for Product Safety testing. This segment accounted for 23.3% of the company’s revenue and for 22.6% of its profits during the firm's most recent fiscal year.

Between 2018 and 2020, Vishay Precision Group saw its revenue drop modestly from $299.8 million to $269.8 million. It's unclear how much of this decline was driven by the COVID-19 pandemic. But because sales did drop in 2019 compared to 2018, it's safe to say that not all of the drop was pandemic driven. In 2021, sales popped up to $317.9 million before shooting higher to $362.6 million in 2022. The 14% increase from 2021 to 2022 was driven by a mixture of factors. The largest was a 13.1% increase associated with higher volume thanks to strong demand for the company's products. The greatest demand increase was associated with the test and measurement markets that the company operates in. In fact, under the Sensors segment, overall sales spiked 19.1%, largely because of a 23.9% surge in volume. For the company as a whole, there was also some benefit caused by higher selling prices. This added 2.6% to the company's top line, while acquisitions were responsible for 3.6%. Sales would have been higher had it not been for a 5.3% hit associated with foreign currency fluctuations.

The bottom line for the business has looked very similar to the top line in recent years. Net income dropped from $23.6 million in 2018 to $10.8 million in 2020. In 2021, it popped up to $20.2 million before nearly doubling to $36.1 million in 2022. In addition to benefiting from a sales increase, the company also saw its gross profit margin climb from 39.4% in 2021 to 41.3% in 2022. This increase, management said, was thanks to the scale associated with volume increases. Naturally, price increases also contributed to the margin expansion. In addition to this, the company saw its selling, general, and administrative expenses declined from 30% of sales to 28.8%. On this front, was mostly because, in the 2021 fiscal year, costs were elevated thanks to an acquisition, as well as because of higher personnel costs. Other profitability metrics followed a similar trajectory, with the exception of operating cash flow. It remained in a very narrow range over the past five years, with a lower end of $30.9 million and a higher end of $35.4 million. If we adjust for changes in working capital, however, it would have spiked from $36.9 million in 2021 to $50.1 million in 2022. Meanwhile, after bottoming out at $37.8 million in 2020, EBITDA for the company expanded to $49.9 million in 2021 before climbing further to $62 million in 2022.

For those worried about the 2023 fiscal year, it's worth mentioning that the final quarter of 2022 was quite robust for the business. Sales of $96.2 million came in 6.9% higher than the $90 million the company reported one year earlier. In addition to that, year-over-year sales growth for the first quarter of 2023 is likely to be attractive. In the first quarter of 2022, sales were $87.7 million. For the first quarter of this year, sales are forecasted to be between $85 million and $95 million. At the midpoint, that would translate to an improvement over what the company saw last year of 2.6%. On the bottom line for the fourth quarter of 2022, profits came in at $8.8 million. That's comfortably higher than the $6 million reported one year earlier. It is true that operating cash flow worsened, dropping from $15.4 million to $12.5 million. But if we adjust for changes in working capital, it would have risen from $10.7 million to $12.2 million. Meanwhile, EBITDA for the firm expanded from $12 million to $15.4 million.

Using data from 2022, I calculated that the company is trading at a price-to-earnings multiple of 16.8. This is down considerably from the 30 reading that we get using data from 2021. The price to adjusted operating cash flow multiple should be 12.1. That's down from the 16.4 that we get using data from the prior year. Meanwhile, the EV to EBITDA multiple should drop from 11.6 using data from 2021 to 9.3 using data for last year. As part of my analysis, I compared the company to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 15.5 to a high of 73. Only one of the five firms was cheaper than our prospect. Using the price to operating cash flow approach, the range was from 19.3 to 740.3. And when it comes to the EV to EBITDA approach, the range is from 11 to 35.7. In both cases, Vishay Precision Group was the cheapest of the group.

Takeaway

Fundamentally speaking, Vishay Precision Group has shown some improvement over the past couple of years. Demand for the company's products has grown and the firm has been able to increase prices to some degree. Expectations for the first quarter of the 2023 fiscal year imply that some slowing of growth may be taking place. But on the whole, shares of the company look cheap, both on an absolute basis and relative to similar firms. It also helps that the company has cash in excess of debt that totals $27.8 million. That significantly reduces the risk for shareholders. All of this combined makes me feel as though a ‘buy’ rating for the company is appropriate at this time.

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