It seems one of my bigger worries about OEM electronics specialist Nam Tai (NYSE:NTE) came true, though not in the way I expected. While the company's decision to focus extensively on the cell phone market was expected to lower its margins, non-cell-phone business results in the third quarter hurt margins even more.
For the quarter, the company reported exceptionally strong revenue growth of more than 50%, but gross profits grew only 23%. Not only did the gross margin decline from the year-ago period (as expected), but it also declined sequentially. On an as-reported basis, operating income rose more than 10%, and net income fell slightly. A pro forma comparison produces operating income growth of about 18% and net income growth of about 50%.
Gross margin for this quarter was hurt by a new product order from a new company. Management chalked up the impact to the normal learning curve with new products: Initial margins are low, but they improve as the company gains operational efficiencies. Unfortunately, management's guidance for the next quarter includes even lower gross margins due to some intensified competition for one of its subsidiaries.
Speaking of subsidiaries, Nam Tai is looking to do some restructuring. Presuming that the intended privatizations go through, the company will buy out the public stock of its Nam Tai Electronic & Electrical Products and J.I.C. Technology subsidiaries. This should simplify the company's corporate structure while boosting earnings as well.
Even with the momentarily negative margin guidance, there's plenty to like about Nam Tai. They do business with major players such as Sharp and Sony (NYSE:SNE) and they have the advantage of low-cost operations in mainland China. What's more, they're growing in a market that has been tough for competitors like Flextronics (NASDAQ:FLEX) and Solectron (NYSE:SLR).
Though it is presently heavily weighted toward cell phone products, Nam Tai does have a respectable consumer electronics business that could provide future growth. However, Fools should keep its upcoming management transitions in mind when performing due diligence on this fast-growing 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).
