Bad, Decent, Great: What’s Next for Nam Tai?

Nam Tai Electronics (NYSE: NTE  ) is gaining steam.

This first quarter of fiscal 2010 was a disappointment. The second quarter was respectable. The just-reported third quarter was fantastic. Where do you go from there?

Before attacking that crucial question, let's explore the evidence at hand. Third-quarter sales increased by 58% from the year-ago period and earnings took a 70% leap to $0.17 per share. Management gives credit for the improvements to "the cumulative effects of the simplification of the Company's corporate organization structure and continued focus on management controls and enterprise efficiencies, which have resulted in cost savings." In simplified English, the company has become simpler to run, easier to understand, and more efficient at filling customer orders over the last year. Those efforts are paying off in spades on the bottom line.

Oh, and Nam Tai has decided to start paying dividends again. That's the kind of announcement that drives share pops even if there weren't any other significant news. Starting at the end of the year, Nam Tai will pay a quarterly dividend of $0.05 per share, which is a much lower payout ratio than the company has provided in the past but still way better than no dividend at all. At today's prices, it amounts to a rather generous 3.4% dividend yield supported entirely by cash flows.

So what's next for Nam Tai? The company can be viewed as the little brother of Foxconn parent Hon Hai Precision Industries, as both specialize in building gadgets for consumer electronics giants at low cost and high efficiency. Foxconn famously builds iPhones and iPads for Apple (Nasdaq: AAPL  ) , while Nam Tai has to settle for somewhat lesser lights. The top customer here is Sharp, but the company also builds calculators for Texas Instruments (NYSE: TXN  ) , phone accessories for Sony Ericsson, home entertainment boxes for Sony (NYSE: SNE  ) proper, and LCD screens for a wide variety of gadget designers.

2009 was a tough year for Nam Tai but the company has recovered to nearly full health. The simpler reporting structure and operations should keep the machinery running smoothly into the future with a solid dividend to boot. This Chinese tiger cub managed all this at a time of waning consumer confidence on a global level -- just imagine what happens when that secular trend turns around.

I'm adding an "outperform" call on Nam Tai to my all-star CAPS portfolio, and I'm in good company since it's a five-star stock (out of 5) where 97% of all votes have been cast in the company's favor. Do yourself a solid and follow my lead, will you?