There are three companies that I find it hard to ignore and there seems to similarities in their business models, products and services. I did not spend a lot of time reading their annual reports, but the brief profile introductions in yahoo finance mentioned that all these companies engage in the business of precision machine parts or tools, mechanical, electrical & electronic devices. See below:
Spindex Industries Limited, together with its subsidiaries, engages in the manufacture, import, export, and trade of mechanical, electrical, electronic, and precision machine parts, as well as other engineering materials. It provides precision turned parts, such as shafts, mini shafts, sleeves, and other critical components used in a range of applications, including consumer copiers, facsimiles, laser printers, inkjet printers, scanners, multi-function centers, commercial printers, commercial offset printers, etc.
Innovalues Limited engages in the manufacture, assembly, and sub-assembly of precision turned machining parts, components, and electronic and mechanical devices worldwide. The company operates through three segments: Automotive, Office Automation, and Others. It provides precision components for office automation, including OA shafts and printer rollers; precision components for hard disk drives (HDD), such as HDD spindle flanges, HDD spindle motor hubs, and HDD pivot assembly shafts and sleeves; precision components for automotive, including mono-crystalline silicon strain gages and occupant weight sensors; and precision rubber products, such as rubber roller cots, textures or groove surface rollers, belts, and flippers.
Micro-Mechanics (Holdings) Ltd. designs, manufactures, and markets high precision tools, parts, and assemblies for the semiconductor, medical, aerospace, and other high technology industries. It has a portfolio of semiconductor tools for the assembly and test process, including rubber tips (integrated circuits), high-temp plastic tools, tungsten carbide tools, sensor assembly, and vacuum wand tools; dispense nozzle adaptor, dispense nozzle, pen dispense assembly, writing pen nozzle tip, and epoxy stamping tools; and ejector needles, needle holders/pepper pot, and needle holder seals.
If you are an avid reader of Value Buddies and Investment blogs you would come across these companies. You don’t usually find these companies in mainstream analyst reports or Motley Fools esp. Micro Mechanics.
Now why would anyone be interested in these companies? Personally for me I know next to nothing about the business of precision tools, they don’t sound ‘sexy’ to me. However, let’s look at their 5 years stock price chart, shall we?
The stock price of Spindex on 9 Jan 2012 was 0.21 (approx. at its lowest in the past 5 years). On 28 Dec 2015, its stock price was 0.64. That represent an increase of 204%.
The stock price of Innovalues on 19 Dec 2011 was 0.062 (approx. at its lowest in the past 5 years). On 28 Dec 2015, its stock price was 0.795. That represent an increase of 1182%!
The stock price of Micro Mechanics on 11 June 2012 was 0.39 (approx. at its lowest in the past 5 years). On 28 Dec 2015, its stock price was 0.84. That represent an increase of 115%.
Just for comparison sake, how did the STI ETF fare during this period?
The price of STI ETF on 3 Oct 2011 was 2.69 (approx. at its lowest in the past 5 years). On 28 Dec 2015, its price was 2.94. That represent an increase of 9%.
Ok, I think I have got your attention. Don’t know about you, but to me “precision tools’ sounds 10 times more sexy now.
However, before I continue, just a minor clarification, the stock prices, charts and percentage increase is just a rough estimate. Very few people can accurately predict the lowest point of any stock price (and we are talking about 3 stocks here). However, we do see a very strong upward trend for these three companies in the past 5 years despite the STI moving almost sideways. In the grand scheme of things, 2015 is considered a bad year, but these stocks aren’t really affected (maybe Innovalues).
In fact, quite a number of value investors are keening waiting for their stock prices to drop.
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Benjamin Graham
Another point, 5 years is not exactly long term. Warren Buffett’s definition of long term is forever or rather min. 10 years. Then again, 5 years is also not exactly short, typically in Peter Lynch’s definition, he normally would advocate holding his chosen stocks for 5 to 7 yrs.
For this post, I will focus mainly on their financials. A post examining about their business models would not do justice. Let’s first look at the figures from Yahoo Finance (see below).
All 3 companies are relatively small. The biggest being Innovalues, with a market capitalisation of SGD 236 mil.
In gist, base on the above table:
- In terms of ‘value’ eg. P/E, Price / Sales, Price / Book & EV/EBITDA, the obvious winner is Spindex.
- In terms of Profitability and Management Effectiveness, Micro Mechanics win hands down. Spindex’s performance is mediocre at best.
- In terms of balance sheet, they are all good. It is like choosing the best out of the best. I think it shouldn’t even be a criteria here, but if we have to compare, Micro Mechanics will be the cream of the crop, with zero debt and highest current ratio.
- In terms of Dividend Yield(%), Spindex’s dividend yield is at 4.44%, Innovalues’ dividend yield is at 2.31%, Micro Mechanics’ dividend yield is at 3.57%. All respectable (not wow high though). Spindex‘s dividend yield is the highest.
Now let’s look at their past historical performance (see below):
In terms of dividend payout, there is an overall upward trend for Spindex and Innovalues. Micro-Mechanics is extremely consistent over the years.
In terms of earnings per share growth, only Spindex and Micro-Mechanics show consistent upward trend, with Micro Mechanics having the higher 5 yrs EPS growth at 20.21.
I initially look at their historical ROA, ROE and ROIC in Morning Star. After looking at the figures, I can’t really tell if there is any upward or downward trend. So I decided to do some charts (see below).
I don’t know about you, but for me, after doing and studying the charts, I still don’t see any trend. I reckon their businesses are cyclical in nature, and in some years the ROA, ROE and ROIC can drop to zero or negative. Frankly I am not particularly fond of cyclical stocks – a large part depends on good timing.
If I had to give an opinion, I would probably say that from 2012 onwards, Spindex and Innovalues seem to have some upward trend in their ROA, ROE and ROIC.
I shall not go into intrinsic value and trailing PEG. I did attempt to calculate the intrinsic value of Spindex in my previous post, and the trailing PEG of Spindex and Innovalues in another post. But the effectiveness of these values is lessen for cyclical stocks. Perhaps a better metric would be the price to book ratio.
Peter Lynch who made many investments in cyclical companies, mentioned that cyclical investors need to think differently. He said that with most stocks, a low PE ratio is a good thing, but not with cyclicals. Buy high, sell low.
Another article mention that investing base on P/E for cyclical stocks is tricky: Investing based on a low price-to-book value is a much smarter strategy. When a company is priced below book value, investors are saying that its future is so bad that the firm isn’t even worth the money that management has spent on assets to conduct business. Buying at a price below NCAV allows you to achieve significantly higher returns than your peers when the industry eventually turns, while taking far less risk. The approach is to buy cyclical NCAV stocks when the industry is deeply depressed and then to sell those stocks shortly after they reach their average earning potential.
If so, looking at their Price to Book ratio, none of these are at their historical low.
In Summary, Micro Mechanics seems to have a lot of good things going for it. In terms of Profitability, Management Effectiveness and balance sheet, Micro Mechanics win hands down. Its 5 years EPS growth is the highest. Being cyclical stocks, Spindex’s low P/E (valuation) might not be a good thing.
In addition, being cyclical stocks trailing PEG and intrinsic values might not be that applicable due to the lack of long term consistent upward earnings trend. Nevertheless base on my previous posts, the current stock of Spindex is still above the intrinsic value I calculated last time. Base on current growth rate, the trailing PEG for Spindex and Innovalues should be below 1 (base on my previous post).
The important metric for cyclical stocks which is the Price to Book ratio seems to suggest that it is still not time to pick up these stocks (as the P/B values are relatively high base on historical figures).