Rating Update: Stock Rating C-Neutral (1/25/19)-Benchmark Electronics Inc (BHE).

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BUSINESS

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

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Reflecting future returns on capital that are 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 (Neutral).
This rating combines contradictory signals from two proprietary PTR measures of a stock’s attractiveness. BHE has a slightly positive Appreciation Score of 62 but a slightly negative Power Rating of 37, leading to the Neutral Value Trend Rating.

BHE’s stock is selling well below targeted value. The current stock price of $24.34 compares to targeted value 12 months forward of $36.
This moderately high appreciation potential results in an appreciation score of 62 (only 38% of the universe has greater appreciation potential.)
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BHE has a Power Rating of 37. (This slightly negative Power Rating indicates that BHE’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: recent price action has been slightly unfavorable; earnings estimate behavior for BHE has been slightly negative recently; and is in a slightly weakened position current.

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 14.5 month down move. The stock has declined 30.0% 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) has recently enjoyed significant positive changes in investment behavior: its shorter term price trend turned up.
The stock is currently rated C.
Benchmark Electronics Inc (NYSE: BHE) stock suffered a major decline of -14.0% on 1/25/19. The shares closed at $0.80. However, unusually low trading volume at 54% of normal accompanied the decline. The stock has been weak relative to the market over the last nine months but has risen 4.0% 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 removed -$21.4 million (-16% of EBITDA) while equity investors received -$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 an opposite trend for the Benchmark Electronics Inc Peer Group. (Since 2015 Non-operating Income, %EBITDA has sharply decelerated.) In most years, BHE was in the third quartile and second quartile. Currently, BHE is above 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 an opposite trend for the Benchmark Electronics Inc 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 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 stability for the Benchmark Electronics Inc 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 an opposite trend for the Benchmark Electronics Inc Peer Group. (Since 2015 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, BHE was in the second quartile and third quartile. Currently, BHE is 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 stability for the Benchmark Electronics Inc Peer Group. (Since 2015 Equity Investors, %EBITDA has accelerated very sharply.) In most years, BHE was in the third quartile and top quartile. Currently, BHE is upper quartile 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 stability for the Benchmark Electronics Inc 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 Benchmark Electronics Inc Peer Group. In most years, BHE was in the 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 strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of BHE’s assets declined over the full period 2008-2018: asset turnover has suffered a strong overall downtrend but it experienced a very sharp recovery after the 2016 low.
Additionally, pretax margin has exhibited little to no overall change but it experienced a very sharp decline from the 2013 level.
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 (-6.8%) for the four quarters ended September, 2018.
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Operating performance (pretax return on assets) is at median (3.2%) reflecting asset turnover that is at median (1.33X) and slightly below median pretax margin (2.4%).
Tax “keep” rate (income tax management) is lower quartile (-129.%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is lower quartile (1.62X).

GROWTH RATES

There are no significant differences between Benchmark Electronics’ longer term growth and growth 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 4.5% per year.

Total asset growth has been 7.8% per year.

Annual E.P.S. growth has been 6.0% per year.

Equity growth has been 6.0% per year.
No consensus growth rate forecast is available for Benchmark Electronics.
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Relative to the Benchmark Electronics Inc Peer Group, BHE’s historical growth measures are generally top quartile. Total asset growth (7.8%) has been upper quartile. E.P.S. growth (6.0%) has been at the upper quartile. Equity growth (6.0%) has been at the upper quartile. Revenue growth (4.5%) has been above median.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Benchmark Electronics’ stock price performance has been variable and below market. Between March, 2008 and January, 2019, Benchmark Electronics’ stock price rose +36%; relative to the market, this was a -33% 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 -25.5% 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 December, 2018 of -25.5% is below median relative to Benchmark Electronics Inc Peer Group.

Current 5-year total return performance of -1.2% is lower quartile relative to the S&P 500 Composite.
Through December, 2018, with lower quartile current 5-year total return of -1.2% relative to S&P 500 Composite, BHE’s total return performance is slightly below median relative to Benchmark Electronics Inc 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. Price/earnings ratio is unavailable.

Relative to Benchmark Electronics Inc Peer Group, BHE’s overall valuation is low. Four of five factors are upper quartile. The highest factor is the price/equity ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/revenue, then by the ratio of enterprise value/assets. Price/earnings ratio is unavailable.
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BHE has a major value gap compared to the median. For BHE to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.29X to 0.48X. If BHE’s ratio of enterprise value/revenue were to rise to 0.48X, its stock price would be higher by $12 to $36.
For BHE to achieve upper quartile valuation relative to the Benchmark Electronics Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.29X to 0.94X. If BHE’s ratio of enterprise value/revenue were to rise to 0.94X, its stock price would increase by $39 from the current level of $24.

VALUE TARGETS

Reflecting future returns on capital that are 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 $35 represents a +46% change from the current price of $24.34.
This moderately high appreciation potential results in an appreciation score of 62 (only 38% of the universe has greater appreciation potential.)
With this moderately high Appreciation Score of 62, the moderately low Power Rating of 37 results in an Value Trend Rating of C.
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Benchmark Electronics’ current Price Target is $35 (+23% from the 2017 Target of $29 and +46% from the 01/25/19 price of $24.34). This rise in the Target is the result of a +8% increase in the equity base and a +14% 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 6.4% — 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 2010 peak of 8%.

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 6.0% — 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 $24.34, investors are placing a negative value of $-4 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 $35 is based on these forecasts and reflects an estimated value of existing assets of $33 and a value of future investments of $2.

About John Lafferty 35825 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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