Rating Update: Stock Rating A-Highest (8/2/19)-Universal Electronics Inc (UEIC).

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BUSINESS

Universal Electronics Inc. develops and manufactures pre-programmed and universal control products, audio-video (AV) accessories, software and intelligent wireless security products, and sensing and automation components for home entertainment and automation systems. The company offers universal infrared and radio frequency (RF) remote controls; integrated circuits on which its software and universal device control database is embedded; and software, firmware, and technology solutions that enable devices, including televisions, set-top boxes, audio systems, smartphones, tablets, game controllers, and other consumer electronic devices to wirelessly connect and interact with home networks, as well as interactive services to control and deliver digital entertainment and information.
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INVESTMENT RATING

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UEIC is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

UEIC has a current Value Trend Rating of A (Highest Rating).
The Value Trend Rating reflects consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. UEIC has a slightly positive Appreciation Score of 68 and a good Power Rating of 81, with the Highest Value Trend Rating the result.

UEIC’s stock is selling well below targeted value. The current stock price of $38.49 compares to targeted value 12 months forward of $64.
This moderately high appreciation potential results in an appreciation score of 68 (only 32% of the universe has greater appreciation potential.)
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UEIC has a Power Rating of 81. (UEIC’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 19% of companies in the universe.)
Contributing to this good Power Rating: recent price action has been extremely favorable. Offsetting factors are earnings estimate behavior for UEIC has been slightly negative recently; and is currently in an unfavorable positi.

INVESTMENT PROFILE

UEIC’s financial strength is average. Financial strength rating is 55.
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Relative to the S&P 500 Composite, Universal Electronics Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that UEIC is normal risk. Relative weaknesses include: low historical profitability, low financial strength, high stock price volatility, and low historical growth. UEIC’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. UEIC has unusually low market capitalization.

CURRENT SIGNALS

UEIC’s current operations are eroding. Return on equity is falling, reflecting: and falling tax keep rate.

UEIC’s current technical position is very strong. The stock price is in a 4.4 month up move. The stock has appreciated 77.4% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

In light of this we are reviewing our current Overall Rating of A. This review will be completed in the next several days.
Universal Electronics Inc (NASDAQ: UEIC) stock closed at $38.49 on 8/2/19 after a major decline of -11.1%. Moreover, unusually high trading volume at 151% of normal accompanied the decline. The stock has declined -7.1% during the last week but has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, UEIC experienced a significant decline in cash of -$14.13 million (-21%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$45.07 million. Non-operating sources contributed +$19.70 million (+44% of EBITDA). Cash taxes consumed -$17.73 million (-39% of EBITDA). Re-investment in the business amounted to -$17.15 million (-38% of EBITDA). On a net basis, debt investors pulled out -$41.50 million (-92% of EBITDA) while equity investors withdrew -$2.51 million (-6% of EBITDA).
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UEIC’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Universal Electronics Inc Peer Group. In most years, UEIC was in the third quartile and top quartile. Currently, UEIC is upper quartile at +44% of EBITDA (+$19.70 million).

UEIC’s Cash Taxes, %EBITDA experienced a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Universal Electronics Inc Peer Group. (Since 2016 Cash Taxes, %EBITDA has accelerated very sharply.) In most years, UEIC was in the second quartile and top quartile. Currently, UEIC is lower quartile at -39% of EBITDA (-$17.73 million).

UEIC’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Universal Electronics Inc Peer Group. In most years, UEIC was in the second quartile and top quartile. Currently, UEIC is slightly above median at -38% of EBITDA (-$17.15 million).

UEIC’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Universal Electronics Inc Peer Group. In most years, UEIC was in the top quartile and lower quartile. Currently, UEIC is lower quartile at -92% of EBITDA (-$41.50 million).

UEIC’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Universal Electronics Inc Peer Group. In most years, UEIC was in the second quartile and top quartile. Currently, UEIC is substantially above median at -6% of EBITDA (-$2.51 million).

UEIC’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Universal Electronics Inc Peer Group. In most years, UEIC was in the top quartile and lower quartile. Currently, UEIC is lower quartile at -31% of EBITDA (-$14.13 million).
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UEIC’s Cash, %Revenue has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Universal Electronics Inc Peer Group. In most years, UEIC was in the top quartile and second quartile. Currently, UEIC is substantially above median at +8%.

PROFITABILITY

UEIC’s return on equity has eroded very significantly since 2009 but it experienced a very sharp recovery after the 2017 low.
The key to the story for UEIC is a very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors.
The productivity of UEIC’s assets remained stable over the full period 2009-2019: asset turnover has exhibited little to no overall change.
Additionally, pretax margin experienced a very strong overall downtrend even as it experienced a very sharp recovery after the 2017 low.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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UEIC’s return on equity is substantially below median (4.3%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is slightly below median (4.6%) reflecting asset turnover that is at the upper quartile (1.20X) and slightly below median pretax margin (3.9%).
Tax “keep” rate (income tax management) is lower quartile (42.7%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is at median (2.20X).

GROWTH RATES

Overall, Universal Electronics’ growth rate has slowed considerably in recent years.
Universal 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 8.9% per year.

Total asset growth has been 8.6% per year.

Annual E.P.S. growth has been 5.4% per year.

Equity growth has been 3.8% per year. (More recently it has been -0.2%.)

Universal Electronics’ consensus growth rate forecast (average of Wall Street analysts) is 15.0% — substantially above the average of the historical growth measures.
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Relative to the Universal Electronics Inc Peer Group, UEIC’s historical growth measures are erratic. Revenue growth (8.9%) has been upper quartile. E.P.S. growth (5.4%) has been upper quartile. Total asset growth (8.6%) has been above median. Equity growth (3.8%) has been substantially below median.

Consensus growth forecast (15.0%) is slightly above median.
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PRICE HISTORY

Over the full time period, Universal Electronics’ stock price performance has been variable and below market. Between October, 2008 and August, 2019, Universal Electronics’ stock price rose +82%; relative to the market, this was a -40% loss. Significant price moves during the period: 1) July, 2016 – May, 2018: -62%; 2) July, 2012 – December, 2014: +417%; and 3) January, 2009 – January, 2010: +111%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 22.5% is at the upper quartile relative to the S&P 500 Composite.
In addition to being at the upper quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of 22.5% is at the upper quartile relative to Universal Electronics Inc Peer Group.

Current 5-year total return performance of -2.1% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of -2.1% relative to S&P 500 Composite, UEIC’s total return performance is below median relative to Universal Electronics Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, UEIC’s overall valuation is normal. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Price/earnings ratio is upper quartile. Ratio of enterprise value/assets is below median. Price/equity ratio is near the lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.

Relative to Universal Electronics Inc Peer Group, UEIC’s overall valuation is quite high. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Price/earnings ratio is upper quartile. Price/equity ratio is at the upper quartile. Ratio of enterprise value/assets is at the upper quartile. The lowest factor, the ratio of enterprise value/revenue, is at median.
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UEIC has no value gap compared to the median valuation. For UEIC to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.89X to 0.90X. If UEIC’s ratio of enterprise value/revenue were to rise to 0.90X, its stock price would be lower by $1 to $39.
For UEIC to hit lower quartile valuation relative to the Universal Electronics Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.89X to 0.79X. If UEIC’s ratio of enterprise value/revenue were to fall to 0.79X, its stock price would decline by $-5 from the current level of $38.

VALUE TARGETS

UEIC is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Universal Electronics’ current Price Target of $65 represents a +69% change from the current price of $38.49.
This moderately high appreciation potential results in an appreciation score of 68 (only 32% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 68, the high Power Rating of 81 contributes to an Value Trend Rating of A.
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Universal Electronics’ current Price Target is $65 (+14% from the 2018 Target of $57 and +69% from the 08/02/19 price of $38.49). This slight rise in the Target is the result of a +8% increase in the equity base and a +6% increase in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple. The forecasted flat growth has no impact. The forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 16.0% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2012 low of 9%.

PTR’s growth forecast is 6.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is well below the 2012 peak of 12%.

PTR’s cost of equity forecast is 8.0% — in line with recent levels. Forecasted cost of equity exhibited a modest, variable increase between 2010 and 2018. The current forecast is steady at the 2010 low of 6.7%.
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At Universal Electronics’ current price of $38.49, investors are placing a positive value of $4 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 6.0% per year, and a return on equity of 13.8% versus a cost of equity of 7.2%.
PTR’s 2020 Price Target of $65 is based on these forecasts and reflects an estimated value of existing assets of $44 and a value of future investments of $21.

About John Lafferty 52821 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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