For all the talk during the election about outsourcing of labor and the drain on jobs in the U.S., it's interesting to note how little attention was granted to a basic, well-known fact: This has been going on for years and years. We use all kinds of products on a daily basis that have been produced elsewhere. Electronics are a good example, as everthing from cell phones to VCRs are produced in countries where costs, including labor, are low.
And, it should come as no surprise that outsourcing is by no means unique to American companies.
With manufacturing facilities in China, Hong Kong-based Nam Tai Electronics
Gross margins were down about 3.2% in the fourth quarter, as the company increased the level of telecom component assembly in its business mix. Exiting the quarter, telecom component assemblies were almost two-thirds of the mix, suggesting that Nam Tai is now highly dependent on worldwide demand for new (and presumably more advanced) cell phones.
Management also announced that it will be spending more money on research and development in coming years to maintain the company's competitive advantage. While Nam Tai's manufacturing base in China gives it an edge in labor costs, technological capabilities are also important. No matter how cheap the labor may be, clients won't stick with vendors who can't meet their technological needs.
To its credit, Nam Tai's management is more than willing to share its wealth with stockholders. For 2005, the company intends to pay a dividend of $1.32 per share -- a rate 175% higher than last year. This marks two straight years of 100%-plus dividend growth, as the company raised its 2004 dividend by 140% over the 2003 level. Though the calculation Nam Tai uses to determine the dividend suggests potential future volatility, there is no question that the company's management believes in returning cash to shareholders.
Nam Tai's valuation looks almost too good to be true on a price-to-earnings basis. If you accept the non-generally accepted accounting principles (GAAP) pro forma EPS number of $2.94, the trailing P/E is less than 8 (and that P/E is only 14 if you use the more conservative GAAP EPS of $1.57). Looking at free cash flow changes the picture a bit. On an enterprise value-to-free cash flow basis, the company's trailing ratio is about 23. While such a number isn't terribly high if the company's growth projections hold out, it highlights the importance of not relying on a single valuation method.
Buy and sell decisions are always tough, but this Fool finds Nam Tai to be even tougher than most. On one hand, you have a dividend yield of nearly 6% from a company that believes it can grow over 25% a year for the next five years. On the other hand, you have a small company with manufacturing based in China that is heavily dependent on cell-phone demand and carries an EV-to-FCF ratio above 20. With such strong growth, considerable options for product expansion, and margins well ahead of the competition, this stock is definitely going on my watch list.
Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned.