An old joke goes that "you don't have to outrun the tiger; you just have to outrun your slowest friend." That might have some relevance to the situation at Chinese electronics assembler Nam Tai (NYSE:NTE). Ordinarily, falling gross margins are a bad thing. But Nam Tai has been able to grow revenue much faster than the margins have fallen.
Nam Tai's history is one of sometimes-volatile performance relative to expectations, but the fourth quarter this year was one of the "good" quarters. Sales were up about 62% and pretty much blew away even the high end of analyst expectations. And though gross margins did sink further (from 12.7% to 10.3%), operating income nevertheless jumped more than 41%.
Nam Tai has stood out for a while amongst broadly defined peers like Celestica (NYSE:CLS), Jabil (NYSE:JBL), and Flextronics (NASDAQ:FLEX), because it pays a dividend (and a generous one at that). Well, that dividend is getting even stronger -- moving from an annualized level of $1.32 in 2005 to $1.52 in 2006.
Much as I like the company, there are a couple of oddities here that investors should pay attention to. First, free cash flow growth dramatically lagged growth in revenue and operating income for the year. Yes, I realize there were some unusual moving parts involved (like gains on sales), but this is still worth keeping an eye on for the future.
Second, the company took the unusual step of naming the same person, Patinda Lei, as both CEO and CFO. This was part of a larger management shift that saw the former CEO/CFO (Joseph Li) moved to one of Nam Tai's subsidiaries, while M. K. Koo remains chairman. Now, I'll grant that Nam Tai seems to run a little differently than your average company (Mr. Koo has a much more public role than most chairmen who aren't simultaneously CEO), but this too is just something to keep in the back of your mind for future reference.
Strangeness aside, it's hard to not to appreciate a company growing at this clip that also manages to pay such a considerable dividend. While ongoing margin erosion is a concern for the future, and a relatively high valuation (using free cash flow) is a concern for the present, I'll nevertheless continue to keep watching this interesting little electronics assembler.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
