Micropac Industries Inc. (MPAD) manufactures and distributes various types of hybrid microelectronic circuits, solid state relays, power operational amplifiers, and optoelectronic components and assemblies. MPAD’s products are used as components in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, power supplies, electronic controls, computers, medical devices and high-temperature products.
MPAD's sales for the first nine months of 2012 decreased $3.21 million or 20.5% below the first nine months of 2011, due to a major decrease in sales of microcircuits space level products with a delay or decrease in new orders in the space industry. The current economic downturn and government funding is resulting in delayed or cancelled satellite programs resulting in lower new orders for space level solid state power controllers, lower sales and lower profits for MPAD.
MPAD is currently trading at a trailing twelve months P/E of 23.47 and a trailing twelve months EV/EBITDA of 5.02. In terms of asset-based valuation metrics, MPAD is a net-net trading at 0.87x P/NCAV and 0.78x P/B. MPAD achieved a ROE of 3.4% over the past twelve months and a five year average ROE of 11.6%.
Financial and Business Risks
MPAD is debt free with cash and cash equivalents of $9.1 million representing 61% of its current market capitalization of $14.9 million.
MPAD continues to experience pricing pressures from some of its OEM customers. In the event of a request for reduction in selling prices on future orders, MPAD has to either improve its productivity, or request similar price reductions from its suppliers.
MPAD’s major customers, which are mainly contractors to the United States government such as Lockheed Martin, Northrop Grumman, Boeing, Rockwell International, and NASA, accounted for approximately 62% of its revenues in 2011.
MPAD provides a one-year warranty from the date of shipment to the original purchaser. Under the terms of the warranty, it is obligated to either replace or repair defective goods or refund the purchase price paid by the buyer.
MPAD’s majority shareholder, Heinz-Werner Hempel, established a partnership organized under the laws of Germany, which owns 1,952,577 shares or 75.7% of the outstanding shares.
Business Quality and Capital Allocation
MPAD’s base products and technologies, primarily used in military, space or aerospace applications, generally have long life cycles.
MPAD maintains a leadership position in the development and manufacture of critical applications, with its strength in optoelectronics and microcircuits integration. MPAD has over 45 years of experience in complex packaging and has a strong space market legacy, beginning with custom power hybrids on the Viking Lander in the mid-1970s. Since then, MPAD has provided countless custom and standard products for the space community and shipped over 150,000 solid state relays and power controllers, over 15,000 of which were for space programs, in the past decade.
A special dividend of $0.10 per share has been paid out in each of the past three years, representing a dividend yield of 1.7%.
Customer concentration risk and huge dependence on government funding and spending is beginning to manifest itself in MPAD's trailing 12 months performance with a ROE of 3.4%. This trailing 12 months ROE of 3.4% is its worst ROE in 10 years and is even below the 5.5% ROE recorded by MPAD in 2009.
The author does not have a position in any of the stocks mentioned.