Bel Fuse (BELFB, Financial) was highlighted in Merion Road Capital Management’s Q4 2024 letter, reflecting the company's strategic transition to capital return and market expansion through acquisitions.
"I began buying BELFB in February of this year after the stock plunged due to a disappointing quarterly release. BELFB designs and manufactures an array of electronic components used primarily in networking / cloud, industrial, aerospace, and military applications. Prior to our ownership, the stock had had a strong run with the company bringing in an outside CFO to improve operations. Specifically, the revamped management team identified a path to bring margins in-line with their peers through a series of initiatives such as analyzing profitability by SKU, repricing business when appropriate, and incentivizing profits over sales. These efforts were incredibly effective, with EBITDA margins increasing from mid-single digits to mid-teens. The stock fell on their Q4 2023 earnings, however, as it became apparent that most of the low-hanging fruit had been extracted. I found the move to be excessive and used it as an opportunity to build our stake. Simply put, I believed the stock was experiencing transition pains as it moved from a margin enhancement play to a capital return story (BELFB had a large percentage of its market cap in cash / a cheap multiple, and had begun repurchasing stock). Though this thesis has played out, a new one has emerged. In September the company announced that they would acquire Enercon, an Israeli-based electronic component manufacturer that predominately serves the aerospace and defense market. While the multiple paid was higher than BELFB’s trading multiple, it appears deservedly so. Enercon is predominately a sole source provider of complex products (i.e. minimum order quantity of 1). This specialization leads to premium margins relative to both BELFB and other publicly traded peers. Furthermore, given the on-going turmoil in the Middle East, the demand for this regional military spending is only going to increase. Lastly, BELFB has the opportunity to achieve some cross selling – this includes BELFB selling some of their products into Enercon’s customer base and opening up Enercon’s products to BELFB’s European customers that require local manufacturing." — Merion Road 2024 Q4 Fund Letter
Read full letter at gurufocus Merion Road 2024 Q4 page.
