Rating Update: Stock Rating C-Low Neutral (8/22/18)-Benchmark Electronics Inc (BHE).

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Benchmark Electronics Inc (NYSE: BHE)

BUSINESS

Benchmark Electronics, Inc., together with its subsidiaries, provides integrated electronic manufacturing services in the Americas, Asia, and Europe. The company provides engineering solutions, including new product design, prototype, test, and related engineering solutions; and custom test, and automation equipment design and build solutions. It also offers manufacturing and fulfillment solutions, including printed circuit board assembly, assembly of subsystems, circuitry and functionality testing of printed assemblies, environmental and stress testing, and component reliability testing; flex circuit assembly and test solutions; and systems assembly and test solutions, as well as environmental stress tests of assemblies of boards or systems.
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INVESTMENT RATING

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With future capital returns forecasted to be in line with the cost of capital, BHE is expected to continue to be Value Creation neutral.

BHE has a current Value Trend Rating of C (Low Neutral).
This rating combines contradictory signals from two proprietary PTR measures of a stock’s attractiveness. BHE has a slightly positive Appreciation Score of 65 but a poor Power Rating of 23, and the Low Neutral Value Trend Rating results.

BHE’s stock is selling well below targeted value. The current stock price of $26.25 compares to targeted value 12 months forward of $33.
This moderately high appreciation potential results in an appreciation score of 65 (only 35% of the universe has greater appreciation potential.)
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BHE has a Power Rating of 23. (BHE’s poor Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 23% of companies in the universe.)
Factors contributing to this poor Power Rating include: BHE’s earnings estimates have fallen very significantly in recent months; recent price action has been slightly unfavorable; and the Printed Circuit Boards comparison group is in a slightly weakened position currently.

INVESTMENT PROFILE

BHE’s financial strength is below average. Financial strength rating is 36.
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Relative to the S&P 500 Composite, Benchmark Electronics Inc has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that BHE is lower risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low expected growth, and low historical growth. BHE’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and low price/book ratio. BHE has unusually low market capitalization.

CURRENT SIGNALS

BHE’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

BHE’s current technical position is very weak. The stock price is in a 9.6 month down move. The stock has declined 24.2% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Benchmark Electronics Inc (NYSE: BHE) suffers from small negative changes in fundamentals: significant quarterly earnings deceleration occurred.
The stock is currently rated C.
On 8/22/18, Benchmark Electronics Inc (NYSE: BHE) stock enjoyed a major increase of 12.8%, closing at $10.10. Trading volume in this advance was normal. Relative to the market the stock has been weak over the last nine months but has risen 2.3% during the last week.

CASH FLOW

In 2017, BHE generated a slight increase in cash of +$61.1 million (+9%). Sources of cash were slightly larger than uses. Cash generated from 2017 EBITDA totalled +$137.7 million. Non-operating uses consumed -$7.7 million (-6% of EBITDA). Cash taxes consumed -$97.7 million (-71% of EBITDA). Withdrawal of investment from the business totalled +$54.9 million (+40% of EBITDA). On a net basis, debt investors withdrew -$21.4 million (-16% of EBITDA) while equity investors withdrew -$4.7 million (-3% of EBITDA).
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BHE’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Bhe Peer Group. (Since 2015 Non-operating Income, %EBITDA has sharply decelerated.) In most years, BHE was in the second quartile and third quartile. Currently, BHE is slightly below median at -6% of EBITDA (-$7.7 million).

BHE’s Cash Taxes, %EBITDA experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Bhe Peer Group. (Since 2015 Cash Taxes, %EBITDA has accelerated very sharply.) In most years, BHE was in the top quartile and second quartile. Currently, BHE is at the lower quartile at -71% of EBITDA (-$97.7 million).

BHE’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Bhe Peer Group. In most years, BHE was in the top quartile and third quartile. Currently, BHE is upper quartile at +40% of EBITDA (+$54.9 million).

BHE’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Bhe Peer Group. (Since 2015 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, BHE was in the second quartile and top quartile. Currently, BHE is slightly below median at -16% of EBITDA (-$21.4 million).

BHE’s Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Bhe Peer Group. (Since 2015 Equity Investors, %EBITDA has accelerated very sharply.) In most years, BHE was in the third quartile and lower quartile. Currently, BHE is slightly below median at -3% of EBITDA (-$4.7 million).

BHE’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Bhe Peer Group. In most years, BHE was in the top quartile and lower quartile. Currently, BHE is upper quartile at +44% of EBITDA (+$61.1 million).
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BHE’s Cash, %Revenue has exhibited a minor overall uptrend over the period. This improvement was accompanied by stability for the Bhe Peer Group. In most years, BHE was in the second quartile and top quartile. Currently, BHE is upper quartile at +30%.

PROFITABILITY

BHE’s return on equity reached a new post-2009 low in 2018.
BHE’s minor negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of BHE’s assets declined over the full period 2008-2018: asset turnover has suffered a strong overall downtrend that acccelerated very sharply after the 2014 level.
Partially offsetting this trend, however, pretax margin has exhibited a volatile overall uptrend but it experienced a very sharp decline after the 2013 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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BHE’s return on equity is lower quartile (-5.7%) for the four quarters ended June, 2018.
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Operating performance (pretax return on assets) is at the upper quartile (3.5%) reflecting asset turnover that is below median (1.25X) and at median pretax margin (2.8%).
Tax “keep” rate (income tax management) is lower quartile (-99.1%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the lower quartile (1.64X).

GROWTH RATES

Overall, Benchmark Electronics’ growth rate has slowed considerably in recent years.
Benchmark Electronics’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 4.1% per year. (More recently it has been 0.4%.)

Total asset growth has been 7.8% per year.

Annual E.P.S. growth has been 6.2% per year.

Equity growth has been 5.9% per year.
No consensus growth rate forecast is available for Benchmark Electronics.
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Relative to the Bhe Peer Group, BHE’s historical growth measures are generally second quartile. Revenue growth (4.1%) has been at median. Total asset growth (7.8%) has been at median. Equity growth (5.9%) has been at median. E.P.S. growth (6.2%) has been substantially below median.

Consistent with this pattern, consensus growth forecast is also unavailable.
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PRICE HISTORY

Over the full time period, Benchmark Electronics’ stock price performance has been variable and below market. Between October, 2007 and August, 2018, Benchmark Electronics’ stock price rose +28%; relative to the market, this was a -31% loss. Significant price move during the period: 1) February, 2009 – April, 2010: +121%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -27.4% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through July, 2018 of -27.4% is lower quartile relative to BHE Peer Group.

Current 5-year total return performance of 2.0% is lower quartile relative to the S&P 500 Composite.
Through July, 2018, with lower quartile current 5-year total return of 2.0% relative to S&P 500 Composite, BHE’s total return performance is lower quartile relative to BHE Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, BHE’s overall valuation is low. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the price/equity ratio, then by the ratio of enterprise value/assets, then by the ratio of enterprise value/revenue. The lowest factor, price/earnings ratio, is unavailable.

Relative to BHE Peer Group, BHE’s overall valuation is low. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the ratio of enterprise value/revenue, then by the ratio of enterprise value/assets, then by the price/equity ratio. The lowest factor, price/earnings ratio, is unavailable.
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BHE has a major value gap. For BHE to achieve upper quartile valuation relative to the BHE Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.30X to 0.94X. If BHE’s ratio of enterprise value/revenue were to rise to 0.94X, its stock price would increase by $34 from the current level of $26.
For BHE to achieve upper quartile valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.30X to 0.94X. If BHE’s ratio of enterprise value/revenue were to rise to 0.94X, its stock price would be higher by $34 to $61.

VALUE TARGETS

With future capital returns forecasted to be in line with the cost of capital, BHE is expected to continue to be Value Creation neutral.
Benchmark Electronics’ current Price Target of $36 represents a +37% change from the current price of $26.25.
This moderately high appreciation potential results in an appreciation score of 65 (only 35% of the universe has greater appreciation potential.)
Notwithstanding this moderately high Appreciation Score of 65, the low Power Rating of 23 results in an Value Trend Rating of C.
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Benchmark Electronics’ current Price Target is $36 (+25% from the 2017 Target of $29 and +37% from the 08/22/18 price of $26.25). This rise in the Target is the result of a +8% increase in the equity base and a +15% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has no positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
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PTR’s return on equity forecast is 6.5% — in line with our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2009 and 2017. The current forecast is steady at the 2011 low of 5%.

PTR’s growth forecast is 7.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2009 and 2017. The current forecast is above the 2012 low of 3%.

PTR’s cost of equity forecast is 6.1% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2009 and 2017. The current forecast is steady at the 2011 low of 4.9%.
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At Benchmark Electronics’ current price of $26.25, investors are placing a negative value of $-2 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 6.0% per year, and a return on equity of 5.8% versus a cost of equity of 5.8%.
PTR’s 2019 Price Target of $36 is based on these forecasts and reflects an estimated value of existing assets of $33 and a value of future investments of $3.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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