Rating Update: Stock Rating B-Positive (3/26/19)-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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BHE is expected to be a modest Value Builder reflecting capital returns that are forecasted to exceed the cost of capital.

BHE has a current Value Trend Rating of B (Positive).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. BHE has a slightly positive Appreciation Score of 65 and a slightly positive Power Rating of 66, and the Positive Value Trend Rating results.

BHE’s stock is selling well below targeted value. The current stock price of $25.97 compares to targeted value 12 months forward of $37.
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 66. (This slightly positive Power Rating indicates that BHE’s chances of achieving attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly positive Power Rating include: the recent trend in BHE’s earnings estimates has been favorable; recent price action has been slightly favorable; and is currently in a modestly favorable positi.

INVESTMENT PROFILE

BHE’s financial strength is below average. Financial strength rating is 38.
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Relative to the S&P 500 Composite, Benchmark Electronics Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Income-oriented investors; the perception is that BHE is normal risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, 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 mixed. The stock price is in a 2.1 month up move. The stock has appreciated 39.4% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

The stock is currently rated B.
Benchmark Electronics Inc (NYSE: BHE) stock closed at $1.63 on 3/26/19 after a major increase of 20.7%. NORMAL trading volume accompanied the advance. The stock has declined -0.8% during the last week but has been strong relative to the market over the last nine months.

CASH FLOW

In 2018, BHE experienced a very significant reduction in cash of -$284.4 million (-38%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$119.5 million. Non-operating uses consumed -$6.4 million (-5% of EBITDA). Cash taxes consumed -$25.4 million (-21% of EBITDA). Re-investment in the business amounted to -$86.7 million (-72% of EBITDA). On a net basis, debt investors removed -$66.1 million (-55% of EBITDA) while equity investors received -$219.4 million (-184% of EBITDA).
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BHE’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Benchmark Electronics Inc Peer Group. In most years, BHE was in the second quartile and third quartile. Currently, BHE is above median at -5% of EBITDA (-$6.4 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. In most years, BHE was in the top quartile and second quartile. Currently, BHE is lower quartile at -21% of EBITDA (-$25.4 million).

BHE’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Benchmark Electronics Inc Peer Group. (Since 2016 Business Re-investment, %EBITDA has experienced a very sharp decline.) In most years, BHE was in the top quartile and third quartile. Currently, BHE is slightly above median at -72% of EBITDA (-$86.7 million).

BHE’s Debt Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Benchmark Electronics Inc Peer Group. (Since 2015 Debt Investors, %EBITDA has accelerated very sharply.) In most years, BHE was in the third quartile and top quartile. Currently, BHE is lower quartile at -55% of EBITDA (-$66.1 million).

BHE’s Equity Investors, %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 lower quartile and second quartile. Currently, BHE is lower quartile at -184% of EBITDA (-$219.4 million).

BHE’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Benchmark Electronics Inc Peer Group. (Since 2016 Change in Cash, %EBITDA has accelerated very sharply.) In most years, BHE was in the top quartile and lower quartile. Currently, BHE is lower quartile at -238% of EBITDA (-$284.4 million).
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BHE’s Cash, %Revenue has exhibited a very small 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 +18%.

PROFITABILITY

BHE’s return on equity has eroded very significantly since 2009 although it experienced a very sharp recovery after the 2017 low.
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 2009-2018: asset turnover has suffered a strong overall downtrend even as it experienced a very sharp recovery after the 2016 low.
Reinforcing this trend, pretax margin has experienced a downtrend that accelerated very sharply 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 below median (2.0%) for the four quarters ended December, 2018.
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Operating performance (pretax return on assets) is at median (2.9%) reflecting asset turnover that is at median (1.35X) and slightly below median pretax margin (2.2%).
Tax “keep” rate (income tax management) is lower quartile (41.1%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is lower quartile (1.68X).

GROWTH RATES

Overall, Benchmark Electronics’ growth rate has slowed very 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 5.2% per year.

Total asset growth has been 7.7% per year. (More recently it has been 3.5%.)

Annual E.P.S. growth has been 0.9% per year.

Equity growth has been 5.0% per year. (More recently it has been -2.8%.)

Benchmark Electronics’ consensus growth rate forecast (average of Wall Street analysts) is 22.0% — substantially above the average of the historical growth measures.
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Relative to the Benchmark Electronics Inc Peer Group, BHE’s historical growth measures are erratic. Total asset growth (7.7%) has been upper quartile. Revenue growth (5.2%) has been at the upper quartile. Equity growth (5.0%) has been above median. E.P.S. growth (0.9%) has been at median.

Consensus growth forecast (22.0%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, Benchmark Electronics’ stock price performance has been variable and below market. Between May, 2008 and March, 2019, Benchmark Electronics’ stock price rose +46%; relative to the market, this was a -27% 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 -10.1% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through January, 2019 of -10.1% is slightly below median relative to Benchmark Electronics Inc Peer Group.

Current 5-year total return performance of 2.7% is lower quartile relative to the S&P 500 Composite.
Through January, 2019, with lower quartile current 5-year total return of 2.7% relative to S&P 500 Composite, BHE’s total return performance is at 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 quite low. Four of five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the price/equity ratio, then by the ratio of enterprise value/assets. The lowest factor, ratio of enterprise value/revenue, is lower quartile.

Relative to Benchmark Electronics Inc Peer Group, BHE’s overall valuation is low. The highest factor, the price/earnings ratio, is upper quartile. Price/equity ratio is at the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Ratio of enterprise value/revenue is lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.
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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 0.49X. If BHE’s ratio of enterprise value/revenue were to rise to 0.49X, its stock price would be higher by $12 to $38.
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 1.01X. If BHE’s ratio of enterprise value/revenue were to rise to 1.01X, its stock price would increase by $45 from the current level of $26.

VALUE TARGETS

BHE is expected to be a modest Value Builder reflecting capital returns that are forecasted to exceed the cost of capital.
Benchmark Electronics’ current Price Target of $40 represents a +54% change from the current price of $25.97.
This moderately high appreciation potential results in an appreciation score of 65 (only 35% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 65, the moderately high Power Rating of 66 contributes to an Value Trend Rating of B.
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Benchmark Electronics’ current Price Target is $40 (+22% from the 2018 Target of $33 and +54% from the 03/26/19 price of $25.97). This rise in the Target is the result of a -1% decrease in the equity base and a +22% increase in the price/equity multiple. The forecasted increase in cost of equity has a slight negative impact on the price/equity multiple and the forecasted decline in growth has a very slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
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PTR’s return on equity forecast is 7.2% — in line with our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is above the 2011 low of 5%.

PTR’s growth forecast is 3.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is below the 2016 peak of 7%.

PTR’s cost of equity forecast is 5.6% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is steady at the 2011 low of 4.9%.
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At Benchmark Electronics’ current price of $25.97, investors are placing a negative value of $-5 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 5.8% versus a cost of equity of 5.3%.
PTR’s 2020 Price Target of $40 is based on these forecasts and reflects an estimated value of existing assets of $36 and a value of future investments of $4.

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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