2023-07-17 08:40:45 ET
Summary
- Eltek produces high-end PCBs which are benefiting from reshoring, producing a secular tailwind for the company.
- Revenue growth is back as its own supply chain problems disappeared and the company is set for further expansion.
- Despite a scorching rally recently, which the shares might have to digest for a while, the shares are still not expensive.
Patience is often in short supply in the investing world but as Warren Buffett has argued, the stock market distributes from the impatient to the patient. This has been very much the case for investors of Eltek ( ELTK ), whose shares have finally taken off after a long wait.
FinViz
We made the case a couple of years ago ( here and here ) that the company was on solid fundamentals as it produces advanced PCBs (printed circuit boards) predominantly selling to defense and the aerospace market (roughly 60% of sales but also to the medical sector.
It should greatly benefits from two trends:
- The pandemic-induced supply chain crisis
- A geopolitical realignment moving supply chains away from China for security reasons.
But the company itself was a victim of the first so it took some time for this to play out, but now it is:
The pandemic-induced supply chain problems now are behind us and the company is set to grow significantly. Indeed, revenue grew 17.6% in Q1 to $11.5M and backlog increased a further 10% from the beginning of 2023, there is no lack of demand.
Meanwhile, there is a great deal of operating leverage going on:
This results in financial performance improving much faster than revenue growth with gross profit increasing by 54% and operating profit more than doubling (from $700K to $1.6M y/y) and net income up 147% to $1.6M although $300K of this is caused by a forex tailwind (the decline of the Israeli shekel against the US dollar).
All this is causing a bit of a cash bonanza:
Operating cash flow in Q1 ($2.8M) was a multiple of a year ago ($300K) and all this cash can be put to good uses:
- Paying off debt .
- Hiring new employees, no less than 50 in FY22 (although none so far this year).
- Increase production capacity, CapEx was $305K in Q1.
Given the secular tailwind from the realignment of supply chains, the company is embarking on an expansion plan. It has already issued orders for the machines for the first phase of the expansion, and some of these machines have arrived and are already operational ( Q1CC ):
We start to get some of the machine earlier and that's result some of our sales increase during Q1... while the rest of that machines is scheduled to arrive by the end of 2025. It is important to note that the installation of these machines will take place gradually through this period resulting in a gradual contribution to our sales and profitability.
Management didn't provide any formal outlook but it did argue that it expects gross margins to increase a little further. It seems that the bulk of the CapEx spend is still ahead as the company did place purchase orders but little is on the books yet.
CapEx has gradually increased as a share of revenue but given the greatly improved financials, the company can easily afford it.
Valuation
With 5.85M shares out and 395K options for performance pay the market cap of the company is $59.3M (at $9.5 per share) and with no debt and cash of $7M the EV is $52.3M.
With FY23 sales estimated at $46.3M this produces a still relatively modest EV/S multiple of 1.1x. EPS is estimated to come in at $0.94 which still makes the shares very cheap on an earnings basis as well.
Conclusion
The company is benefiting from a secular shift, benefiting from the reshoring of critical supply chains which their high-end PCBs are very much a part of as a result of pandemic disruptions and increasing tensions between the US and China.
We don't see this turning around anytime soon and the company is banking on it by further expanding production capacity. Revenue is growing, margins are expanding and cash flow has taken off, enabling the company to repay debt and expand CapEx.
Despite a scorching rally in May which the shares are digesting, the shares are still really quite reasonably priced.
As the company is benefiting from secular growth trends and is still reasonably priced there is not a huge deal of downward risk we can think of, we guess a recession could slow things down but that's about it.
For further details see:
Eltek Finally Finds Its Legs; Buy