Description

Pacific Insight Electronics is a micro-cap ($24.9 million) company that designs, manufactures and supplies electronic components. It's primary customers are in the automobile, heavy truck and marine industries. Despite the slowdown in these markets over the past several years, PIH has been able to grow it’s sales every year for the past 6 years. It has been steadily winning new contracts as it has shown its innovation in designing cost-effective and creative new products. It has achieved Ford Motor Company Q1 accreditation and has won supplier of the year award from General Motors for the past 6 years. The company constructed a new facility in 2001 to ensure sufficient capacity for expansion to $50-70 million in sales (FY03 sales est. is $25 million).

The company is in excellent financial condition with no debt (the 2 founders don’t like debt) and cash of $1.78 million. Historically the company has funded its growth through internally generated cash flow with a temporary drawdown on its credit facilities as needed. Revenue has grown from $6.5 million in 1998 to FY03 (ends June 30) of $25 million – a compound growth rate of 31%. Over the same time period net income has grown at an estimated 33% and on an EPS basis the growth rate is 25%. The growth rates over the last couple of years have not been as high these figures but are still impressive given the economic slowdown and state of the company’s end markets. Net income margins are expected to increase from 6.9% as the company absorbs some of the fixed expenses from its growth over the past couple of years (margins were as high as 10.8% in 99/00) – I think that a realistic short-term target is 7.5 - 8.0%. The stronger Cdn$ vis-à-vis the US$ does negatively impact their profit margin.

The shares are currently trading at the low end of its valuation range for the past few years with an estimated P/E of 14.3 ($3.00/$0.21), P/S of 1.0 ($3.00/$25/8.3) and P/BV of 1.75 ($3.00/$1.75). Using a 10% cap rate and DCF model, I estimate the company’s intrinsic value at $4.53 based on a FCF of $1.5 million growing at 20% for 10 years and 5% thereafter. Over the next year the shares could very reasonablly trade at a P/E of 20 and with FY04E (started July 1, 2003) of $0.27 would yield a price of $5.40 (price was that high in 2000). In my view this company has limited downside but should be a nice steady grower over the next few years.

Catalyst

Catalysts:
1. The main catalyst is that the company continues to execute its business plan as it has done for the past several years with a corresponding increase in financial results.
2. The company could win a large contract(s) which would significantly improve its short-term performance. One possible source would be if current lobby efforts cause US regulations to change mandating daytime running lights in vehicles (a move supported by GM and mandated in Canada for several years).
3. Potential takeover target most likely led by management
4. Active share repurchase program provides some support to stock price with average price paid being $3.25 over past 9 months.