Summary
- Through efficiency improvements, cost cutting, and a strong dollar, Eltek's break-even point has been lowered from about $12 million to $10.5 million/quarter.
- Eltek is investing heavily to increase revenues and market share in the US and Canada. This effort is starting to yield tangible results.
- There are potentially significant positive catalysts short and long term such as increased Israel military spending, and Israel's recent entry into the commercial space race.
- There are also potentially significant risks if Eltek is unable to improve results such as an eventual delisting from NASDAQ.
Eltek Ltd. (ELTK), provides specialized products and services in the printed circuit board (PCB) business, mainly in Israel, North America, and Europe. Eltek's largest markets are defense and aerospace, medical equipment, industrial, telecom, and others. Eltek specializes in designing and manufacturing durable and reliable advanced Rigid and Flex-Rigid PCBs for mission-critical applications in tough environments.
As a result of declining sales to Israel's military/defense sector, Eltek's management has been looking at ways of increasing revenues. By making a big push in the US and Canada, the company is expecting improved financial results going forward.
During the 1Q 2015 conference call, Eltek's CEO Yitzhak Nissan commented:
"We have been focused on increasing sales to the US market where we believe customers perceive our products as having both high reliability and top quality. Incoming orders from the US during the first quarter of 2015 increased by 11% compared to the first quarter of 2014. We believe that as a result of our increased marketing activities and our recent expansion of our sales force in the West Coast we will be able to increase our US sales this year."
"Based on these steps, I am optimistic regarding the Company's ability to return to sustainable profitability in the future."
Deputy CEO Roberto Tulman was also bullish about the company's future during an interview in this year's IPC APEX EXPO conference held in February 2015 in San Diego, CA.
"The market was slow the last few months of 2014, but we are seeing a pickup in February already. We believe the market going forward will be very good for us....we are seeing very nice orders for the coming months.."
"The new equipment recently installed (he listed several items) will improve efficiency and therefore increase gross margins, and will reduce our time to market which has been historically slow due to aging equipment."
On June 8, 2015 the Eltek announced the relocation of its US headquarters to accommodate the new growth and to make it easier for new and existing US clients to work on projects from the ground up. When making the announcement, Mr. Jim Barry, President of Eltek USA, stated:
"As a corporate member of the Surface Mount Technology Association (SMTA) and IPC, and as an innovator in the rigid-flex market, we are well positioned to support our local customers from this location. The new location will also give us the capability to have onsite source inspection in the US. In addition, steps taken by our parent company at its manufacturing plant in Petach-Tikva to enhance our service to our US customers are already yielding a positive market response."
Eltek must be seeing very good demand and/or potential in North America because it's now looking for several more sales people to cover various regions of the US and Canada. The add posted in the company's website states "Eltek's business is rapidly growing within North America therefore we need some key individuals to help us manage and share in this growth."
For those unfamiliar with Eltek, the company announced in August 2013, that Nistec Ltd. acquired 50.5% of Eltek. Nistec Ltd., a leading provider of Electronic Manufacturing Services (EMS) and design services based in Israel, was founded in 1985 by Yitzhak Nissan. Mr. Nissan claimed that he was acquiring Eltek to provide an end-to-end suite of products and services by joining the two companies. Prior to the Eltek purchase, Nistec used to buy PCBs from several approved suppliers. Mr. Nissan assumed the role of Chairman and CEO of Eltek shortly thereafter.
Mr. Nissan made it clear that his goal was to double Eltek's production capacity and to increased profitability. To accomplish this, he bought equipment and technology that cash-strapped Eltek could not afford prior to the acquisition. But so far, the vertical integration and synergiesthat Mr. Nissan expected have not materialized. In fact, revenues have decreased steadily and profits turned to losses from 2013 to 2014 as seen in the following table:
Key Metric | 2014 | 2013 |
Revenues, $M | 46.2 | 50.6 |
Net Income, $M | (2.7 loss) | 3.8 |
Net Income, c/share | (26 loss) | 53 |
Cash, $M | 1.2 | 2.5 |
Equity, $M | 9.3 | 13.3 |
The downtrend continued in 2015 as first quarter revenues were down 33% year-over-year as seen in the following table. But there was a silver lining, as the net loss and other metrics in Q1 20151 were similar to those of 1Q 2014 on 24% lower revenues as can be seen in the following table:
Key Metric | 1Q 2015 | 1Q 2014 |
Revenues, $M | 9.7 | 12.3 |
Net Income, $K | 234 loss | 187 loss |
Net Income, c/share | 2 loss | 2 loss |
EBITDA, $K | 316 | 354 |
The reduced loss was due primarily to cost-cutting and efficiency improvements that Eltek has been implementing since early 2014 in anticipation of lower revenues.
Assuming that cost cutting and efficiency improvements as well as the favorable dollar/shekel ratio continue, Eltek has essentially lowered the breakeven point to about $10.5 million in revenues from over $12 million a year ago.
Ok, the stage is now set for Eltek to return to profitability. Assuming a nominal 20% increase in US revenues while maintaining revenues from other regions constant, Eltek should return to profitability in the current 2Q 2015 to be reported in July.
Any pick up from Eltek's biggest client, Israel's defense/military will help significantly. In this regard, the recent Iran-Israel tensions and the constant threat from other neighbors and extremist groups could trigger more military spending. I also expect that Eltek will benefit from Israel's recent entry into the commmercial space race. My instablog dated May 15, 2015 looks into this potentially significant long-term catalyst in more detail.
Finally, I expect that the elusive vertical integration with Nistec will start to bear fruit. During the 4Q and FY 2014 conference call Eltek's Chairman and CEO stated:
"Even though we did order PCBs from Eltek, but now we are working on an agreement that we'll have to bring to the committee (possibly to avoid conflicts of interest) so we'll be able to order more. I really believe that the synergy between Nistec and Eltek can do a lot more than we have done last year."
Conclusions
I believe ELTK is a safe investment with potentially significant upside at current historically low prices. I fully expect that Eltek's continued effort to minimize operating costs, the strong US dollar, improvements on vertical integration with Nistec, an increase in orders from the US, and other catalysts mentioned above will have a positive impact on the company's financial results going forward.
Eltek's valuation will quickly increase with a return to profitability. Eltek is trading at less than 0.2 times sales, or a fraction of the sector average of 0.92. With a market cap of about $9 million Eltek is undervalued when compared to the "reproduction value" of $37.59 million calculated by SA contributor Daniel Gilcher. He defines "reproduction value" as the cost that a competitor would have to invest to enter the market with a similar set-up of assets as Eltek's.
Value seekers are encouraged to do their own due diligence before investing in ELTK because it has a float of only 4 million shares and losses could be significant if the bull-case scenario does not materialize. Investors considering buying this, or any other stock, should always read carefully the risks and uncertainties as spelled out in the company's 10-K and 10-Q filings.