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As I promised yesterday, let's take a closer look at Universal Electronics (UEIC) that I added to my own trading portfolio after my partial sale of Bolt (BTJ). UEIC closed at $27.89, up $5.35 or 23.74% on the day. This stock easily made the list of top % gainers on the NASDAQ. As I just indicated, this particular stock is a stock that I now am an owner of, so please take that into consideration as well.
What exactly does this company do?
According to the Yahoo "Profile" on Universal Electronics, the company
"...provides preprogrammed wireless control products and audio-video accessories for home entertainment systems, as well as software designed to enable consumers to wirelessly connect, control, and interact with a home environment. The company's family of preprogrammed wireless control products includes touch screen remote controls, wireless keyboards, game controllers, antennas, and various audio/video accessories, as well as custom and customizable microcontrollers that include its library of infrared remote (IR) codes, proprietary software, and digital media control software."
How did they do in the latest quarter?
It was the announcement of 4th quarter 2006 earnings and 2007 guidance after the close of trading Thursday that drove the stock higher Friday. Net sales for the quarter came in at $69.7 million, an increase of $20.4 million or 41.4% over sales of $49.3 million in the same period in 2005. Net income for the quarter was $5.4 million or $.37/share, compared to $3.5 million or $.25/diluted share, approximately a 50% increase year over year.
This $.37/share exceeded expectations of $.32/share according to analysts following the stock. The company also raised guidance for 2007 to earnings of $1.13 to $1.23/share. This was ahead of 'Wall Street estimates' of $1.09/share. From my own perspective, the combination of strong revenue increases with earnings growth which exceed expectations and having the company raise guidance in the same announcement is often associated with a price increase in equities.
How about longer-term financial results?
Reviewing the Morningstar.com "5-Yr Restated" financials on UEIC, we can see that except for a dip in revenue between 2001 and 2002 when revenue dropped from $119 million to $104 million, the company has been steadily increasing revenue up to $181 million in 2005 and $202 million in the trailing twelve months (TTM).
Earnings which also dipped from $.78/share in 2001 to $.42/share in 2002, have subsequently steadily increased to $.69/share in 2005 and $.77/share in the TTM. No dividends are paid and the outstanding shares have remained steady at 14 million in 2001 and 14 million in the TTM.
Free cash flow, which dropped from $17 million in 2003 to $1 million in 2004, increased to $11 million in 2005 and $14 million in the TTM.
The balance sheet, as presented on Morningstar, appears very solid with $58.8 million in cash, which alone can easily cover both the $47.0 million in current liabilities and the negligible $100,000 in long-term liabilities. Calculating the current ratio, we get a total of $137.4 million in total current assets which when compared to the $47.0 million in current liabilities yields a current ratio of 2.92. Generally ratios over 1.25 are considered 'healthy'.
How about some valuation numbers?
Checking the Yahoo "Key Statistics" on Universal Electronics, we can see that this is a small cap stock with a market capitalization of only $390.49 million. The trailing p/e is a moderate 34.22, with a forward p/e (fye 31-Dec-07) estimated at 25.82. With the rapid growth, the PEG ratio (5 yr expected) is estimated at 1.24. This is well within my 1.0 to 1.5 range that I view as a reasonable PEG.
According to the Fidelity.com eresearch website, UEIC has a Price/Sales (TTM) ratio of 1.63 with an industry average of 1.22. The company also has a return on equity (TTM) of 11.14% close to the industry average of 11.65%. At least by both of these valuations, we find that the company is selling at a slight premium to its peers in the same industrial group.
Finishing up with Yahoo, we see that there are 14 million shares outstanding with only 13.86 million that float. Of these shares that float, there were 428,400 shares out short as of 1/9/07. This represents 11.4 trading days of volume (short ratio) due to the low average volume of 65,686 shares. This significant short interest may well have 'squeezed' the short-sellers yesterday causing the sharp price increase as short-sellers, I suspect, were scrambling to exit their positions by buying back shares that they had previously sold to close out their speculation on a price drop.
As I noted, no dividends are reported on Yahoo, and the last stock split reported was a 2:1 split in February, 2000.
What does the chart look like?
Taking a look at the "Point and Figure" Chart on Universal Electronics, actually for the first time as I write this up, I am struck by what appears to be a classical William O'Neil "Cup and Handle" configuration.
Now I am not a technician, and I don't put a huge amount of weight into stock price patterns, but I remember reading about cups and handles when reading How to Make Money in Stocks...and even this is a Point and Figure Chart, this certainly has that characteristic, of a dip, a long period of consolidation, then a break-out on the upside.
This is an illustration of a Point and Handle from StockCharts.com:
In any case, whether the stock is truly a "cup and handle" or not, the chart appears encouraging because the stock is just now moving higher after a long period of moving sideways. It certainly doesn't appear over-extended.
Summary: What do I think?
To summarize, I liked this stock enough to buy some shares :). The stock moved strongly higher yesterday, likely as shorts were squeezed. They announced great earnings results, exceeded estimates, and raised guidance. The Morningstar.com looks nice with several years of revenue and earnings growth without increasing the stock float. Free cash appears positive and growing, and the balance sheet is solid. Valuation-wise the p/e is a tad rich but the PEG suggests reasonable valuation. The Price/Sales and the ROE are a bit under their peers but with the strong growth, a premium might well be worth it. Finally, the chart looks solid.
I had that nickel in my pocket for about 15 minutes, lol, and I spent it. Now I got myself a remote control stock :). Hope it works out great!
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