UPG is a net-net trading at a P/NCAV of 0.39 and P/NTA of 0.38. Its current P/B valuation represents a 50% discount to its five-year average P/B of 0.76. In terms of earnings-based valuations, it is valued at a trailing 12 months P/E of 30.79 and a trailing 12 months EV/EBITDA of 19.07. UPG achieved a 1.3% ROE for the past 12 months and a five-year average ROE of 6.7%.
The GuruFocus chart below shows a negative value for NCAV, as GuruFocus calculates NCAV using the traditional Graham Net Current Asset Value definition of 100% of cash, 75% of receivables and 50% of inventories, while I simply deduct total liabilities from total current assets. In UPG's case, inventories and receivables accounted for three quarters and one quarter of current assets.Also, UPG has grown its book value per share by a respectable five-year CAGR of 8.2%, partly boosted by the goodwill from the 2011 acquisition of Progressive Technologies.
UPG NAV, NTA, NCAV Comparison
UPG has been been profitable for every year since its listing in 2006, except for 2009 where it suffered a narrow loss of approximately $130,000. It is worth highlighting that capital expenditures have been minimal for UPG, with free cash flow closely tracking cash flow from operations. Gross profit margins have been increasing steadily over the years, while EBITDA and net margins are on a slight downward trend.
UPG Earnings-Cash Flow Comparison
UPG Profit Margins Analysis
Financial and Business Risks
UPG is heavily geared with a gross debt-to-equity ratio of 93% with negligible long term debt. This is not helped by a low interest coverage ratio of 4.4. The chart below shows that UPG's free cash flow generation is poor.
UPG Cash-Debt-Market Capitalization Comparison
UPG is seeing gross profit margin for the first nine months of fiscal 2012 drop to 17.2% from 19.8% in 2011. This is the result of the forced closure of its largest batteries supplier, which accounted for 46% of its 2011 inventory purchases, following the China Ministry of Environmental Protection’s investigative efforts on production practices. UPG still has to honor its pricing commitments customers, on top of supply disruptions and higher material and labor costs in China. UPG has replaced this larger supplier with a limited number of smaller suppliers.
Since Broadview, UPG's largest customer with 45% of 2009 sales, was acquired by ADT Security Services, a subsidiary of Tyco International in May 2010, UPG's sales to ADT/Broadview has dropped dramatically from $50 million in 2009 to $14.3 million and $8.6 million in 2011 and the first nine months of 2012, respectively.
While UPG will benefit from the growing trend for original equipment manufacturers and contract electronics manufacturers to outsource their procurement, inventory and materials management processes to third parties, there is also an equally common trend of original equipment manufacturers and retailers bypassing the distributors and contracting directly with the component manufacturers.
Business Quality and Capital Allocation
UPG's value-added services and infrastructure puts in it in a good position to capitalize on the increasing trendof outsourcing. UPG offers additional services such as sourcing, custom kitting, battery pack assembly, product development, private labeling and coordinating customers with licensed EPA approved handlers for their battery recycling efforts, which are not commonly provided by other third-party logistics or supply chain services providers. In addition, it carries a broad range of products covering 75 classes of products and approximately 4,500 SKUs, to allow for prompt response to customer needs. On Nov. 12, 2012, UPG announced the signing of a lease for a distribution center and corporate office in Coppell, Texas and will relocate in March 2013. UPG claims that the new facility will provide for greater warehouse, distribution and operating efficiencies through improved layout and greater racking capabilities.
On April 25, 2011, UPG announced it has acquired Progressive Technologies Inc., a North Carolina-based battery pack manufacturer specializing in lithiumion battery packs, the fastest growing segment of the battery market, for $3.3 million. The increase in sales from Progressive Technologies has helped to partially offset the decreases in sales to ADT. Progressive Technologies holds several ISO certifications required by medical and other specialized purchasers of battery packs and will enable UPG to expand its product offerings, and penetrate new markets such as medical, technology, government and military.
UPG does not pay a dividend.
With little cash on the balance sheet, UPG is mainly financing its working capital needs (four months in inventory days) through lots of short-term debt. It also faces both supplier and customer risks with supply disruptions and reduced sales from its largest customer. But a profitable stock with such undemanding valuations demands a second look. The appropriate discount on $34 million of inventories, consisting of batteries and security products related to its third-party fulfillment services and materials used in the assembly of batteries into “packs,” is the key issue. You are paying for a quarter of the book value of inventories of $34 million, when you buy UPG (market capitalization of $8 million).
The author does not have a position in any of the stocks mentioned.