At certain points in the economic cycle, simple trading strategiesrule and investors prefer boring companies that churn out regular cash flow. This type of investment makes sense to them over all the exciting stocks to buy that turn out more glamorous products. I probably don’t need to tell you that the present market is one of those points, as investors look for low risk investments. And so in that vein let me tell you about one of my model’s top stocks for this month: AVX Corp. (AVX), a manufacturer of �electronic components based in Myrtle Beach, S.C.
AVX makes some of the most munane but useful components in a lot of the electronic devices you use every day, ranging from your cell phone and computer to your electric toothbrush and your car’s braking system. Its “passive” components store, filter, and regulate electric energy, performing such essential tasks such as adjusting voltage so that your phone does not short-circuit or your brakes do not lock up.
Some of AVX’s products are real life-savers. One stimulates artificial heart beats. Others�bring sound to the hearing-impaired and sight to those with vision problems.�Its automotive segment improves engine control and safety.
AVX’s electronic parts are used in every industry, helping it brave recessions better than companies with more specialized products. Major�customers include�Robert Bosch GmbH, the world’s largest supplier of automobile components;�Motorola (MOT); and�Hewlett Packard (HPQ).�Sales are diversified across the world, with 31%, 24% and 45% of 2009 sales coming from Americas, Europe and Asia, respectively.
The company was founded in 1972 as a manufacturer of ceramic capacitors, which are used to regulate electric current. In 1990, Japanese tech goliath Kyocera bought it, and then five years later spun out a 25% stake to the public. By 2001, AVX had established a global presence with over 26 plants in 10 countries. With 2009 sales of $1.3 billion, AVX’s market cap has grown to $2.3 billion.
During the past recession, many consumers put off purchases of electronic gadgets and cars, briefly depressing AVX sales. But as soon as manufacturers needed its early-cycle components again, the company was among the first tech suppliers to get the call to rev up its plants again — and that’s why the chart above shows it got off the ground faster than its tech and industrial peers in early 2009.
AVX is well positioned to grow now as its�product line is balanced between high volume commodity products and higher-margin specialty products aimed at the exploding market for smart phones that need very sophisticated power management capabilities. Leaning on its Kyocera relationship and a robust R&D spend, last year the company developed a super-fast, extra-tiny, next-generation memory card that has been gobbled up by makers of mobile devices and GPS system.
Risks include minimal pricing power. Customers have low switching costs between suppliers and place orders based on delivery time and price. Major clients such�Cisco Systems (CSCO) and Nokia (NOK) have no long-term contracts with AVX. To retain market share, the company must maintain its edge at keeping costs low while still innovating and marketing like crazy.
Most top executives have been with AVX more than 30 years and use their experience to adjust inventory during cyclical downturns. Chief exec John Gilbertson has been with the company since 1981 and is reasonably paid $1.4 million for total compensation.
AVX is in great financial health with no debt and $4.04 in cash per share. Its 13.1% operating margin is double that of competitors, which average 5.5%.
At its current stock price of $13.27, AVX holds over 30% of its share price in cash. My model forecasts 2011 earnings of $1.25 per share. With a P/E of 15, we’re looking for a $16.50 price target, or 25% upside. Backing out that cash, we’re looking at a stock that trades for less than 11x forward earnings. Whatever your rules for buying stocks, that makes AVX a good stock to buy.
For more ideas, check out my Trader’s Advantage and�Strategic Advantage newsletters.
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