Perhaps Nam Tai (NYSE:NTE) had its current scenario in mind when it decided to cut dividend guidance a little while back. Shares are getting smacked around today, after the company posted uninspiring results and iffy guidance. If this proves to be a sign of things to come in the short term, Nam Tai management may have wisely concluded that the stock would be weak, and chosen to save its cash for internally funded expansion, lest it be forced to raise money when its stock price was depressed.
Turning toward those results, we see that revenue was up about 15%, while margins fell considerably once again. Gross margins dipped below 10%, while operating margins are now courting 5%. And while many companies would probably be thrilled with 15% revenue growth, that's the lowest level I've seen since I started covering Nam Tai for The Motley Fool.
What's more, it appears to me that the company is moving toward lower-margin business prospects. For instance, it said it will soon manufacture its own flexible printed circuit boards -- a commodity market if ever there were one. While I can appreciate the virtues of securing internal supply, I'd much rather see Nam Tai pursue more high-margin electronics-assembly business.
Even though Nam Tai continues to produce cash, slowing growth and shrinking margins are not exactly chicken soup for the value investor's soul. That's particularly true given the presence of other, better-looking cell-phone plays like OmniVisionTechnologies (NASDAQ:OVTI) and Silicon Labs (NASDAQ:SLAB). (Most of Nam Tai's business is cell-phone-related.) OmniVision may have margin issues of its own, but at least it's trying to move into higher-margin businesses; meanwhile, Silicon Labs is actually improving margins.
I've been a fan of Nam Tai for a while, and I've owned its shares a few times, but I'm not looking to buy right now. Maybe its current moves will prove wise over time, but I'm nervous when I see Nam Tai heading in the opposite direction from companies like Jabil (NYSE:JBL). I'd certainly consider repurchasing a stock I've previously owned, but I'll need to see either much cheaper valuation or some margin stability before I try my luck again here.
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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).
