You don't find too many small-cap tech companies growing at a 30% clip and paying a dividend yield of more than 5%, yet Hong Kong's Nam Tai Electronics
Sales at this contract manufacturer climbed more than 64% in the first quarter as the company continued to see strength in its telecom components assembly business -- particularly in products such as CMOS image sensor modules for cell phones with built-in cameras.
This business is rather low-margin, though, and the company's gross margin dipped 3.3% to 11.7% for the quarter. The company was, however, able to recoup some of this through management efficiencies, and the drop in operating margin was limited to 1.1% (down to 6.2%).
Operating earnings grew just more than 40% to $9.7 million. While the company reported $13.8 million in net income (nearly 87% growth), about $5.9 million of that came from a gain on a partial sale of a subsidiary. Backing that out, the company had about $0.19 in earnings -- missing the Wall Street median and barely up over last year.
So what's the real picture at Nam Tai? Given the company's convoluted holding structure and extensive investments in subsidiaries and other companies, I'd argue that net income isn't the most reliable measure of performance. Rather, I'd suggest operating income is the metric to pay attention to, and by that standard, the first quarter was pretty good.
Of course, I'm not suggesting that investors completely ignore bottom-line net income. Rather, I'd suggest that investors need to understand that it will jump around a bit because of gains/losses on investments and various minority interest contributions. These variations should balance out over time, but in the short run, operating income is likely a "cleaner" measure to use.
What concerns me more than the income statement is the company's decision to focus on the telecom assembly business. With nearly two-thirds of revenue coming from this business, the company is tremendously dependent upon the cell phone industry and the success of customers such as Sharp and Epson. What's more, that business isn't especially high-margin, and the company will have a tough time achieving gross margins much above the low-teens level.
Nevertheless, it's tough to argue with a growing company that pays a healthy dividend. Nam Tai has been volatile on a quarter-to-quarter basis in the past, and I'm pretty certain that will continue. While the company operates in a near-commodity business, that doesn't mean that they can't grow, and investors comfortable with the risk and volatility might want to view the periodic hiccups and stock market thumpings as a chance to buy shares at a temporary discount. It's certainly not the safest stock around, but you don't get paid much for risk-free opportunities.
For more on the cellular world:
- Dialing for Divas
- Cell-Phone Towers' Mixed Signal
- Unsafe at Any Frequency?
- Nam Tai Shares the Wealth
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).