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Benchmark Electronics: Liquid and Discount to NCAV

September 27, 2011 | About:
Barel Karsan

Barel Karsan

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So many of the net-nets discussed on this site are illiquid, and therefore shunned by you, the investor. But when the market takes a dive like it has over the last couple of months, even some relatively large companies start to trade at discounts to their net current assets. Once such example is Benchmark Electronics.

Benchmark is a manufacturer of electronic devices (such as medical devices, computer parts etc.) for original equipment manufacturers who outsource some or all of their production (e.g. its largest customer is IBM, which accounted for 13% of the company's sales last quarter).

The company trades for $775 million, despite net current assets of $850 million including a net cash (that is, cash less debt) balance of almost $300 million.

At such a beaten down market cap relative to its assets, you might expect this company to be either losing money right now, or a perennial "loser" of money. But it is not. The company remained profitable throughout the recession (ignoring a Goodwill writedown in 2008) and has generated hundreds of millions of dollars of cash over the last few years.

What may turn off investors is the fact that the margins in this industry are extremely thin. Manufacturers are always looking for the cheapest solutions, and so management has to be very cost-conscious to keep the company competitive (e.g. the bulk of manufacturing operations is now done in developing countries, which have a labour cost advantage). Shareholders are being compensated for the low margins, however, as the company trades at less than 1/3 of its annual revenue.

The company also appears relatively shareholder-friendly of late. Benchmark has been buying back shares throughout the recession; however, it should be noted that a large portion of the company's cash balance is stuck overseas. The fact that US corporate taxes and repatriation taxes are higher than those in the rest of the world continues to drive corporations to divert capital overseas and keep it there (rather than pay out shareholders or re-invest at home).

Benchmark offers investors a profitable company at an attractive price. In addition, its large market cap offers liquidity for investors who have a penchant for stocks trading at discounts to their net current assets, but also want to be able to sell large blocks of shares in a hurry.

Disclosure: No position

About the author:

Barel Karsan
GuruFocus - Stock Picks and Market Insight of Gurus

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