Measurement Specialties, Inc. - A Wax Ink Raw Value Report
Every business day, a company’s management makes the decision that to stay competitive in a global marketplace, it must improve company efficiency and increase productivity.
Engineers and Production personnel are consulted. Process and financial models are constructed. Feasibility studies are done. After all, there are costs associated with increasing efficiency and productivity, and the prudent management team will want to understand those costs before committing company capital.
Finally the determination is made that in order to achieve the goals established by management, and to implement the plan developed by engineering and production personnel as efficiently as possible, the business model must be changed. And so the decision is made to either increase, or add, automation.
The temperature of chemical reactions must be precisely measured to ensure that the resulting product is within the tolerances of a future buyer, the speeds at which large industrial machines operate must be measured to ensure safe operation and asset life, and the scales over which trucks loaded with goods bound for the rest of world travel, must provide accurate information for shipping companies as well as the political subdivisions responsible for highway maintenance.
Such is the business of Measurement Specialties, Inc. (Nasdaq: MEAS), a global designer and manufacturer of sensors and sensor-based systems, which measure pressure/force, position, vibration, temperature, humidity, and fluid properties.
The company's products are used as embedded devices by original equipment manufacturers (OEMs), as stand-alone sensors for testing and measurement, to provide critical monitoring, and to provide feedback or control input.
The company’s portfolio includes technologies capable of measuring most physical characteristics, which allows the company to design the right sensor for the application. Physical property, electrical input/output and package configurations are all important considerations when developing products to meet customer needs.
In addition, the company continues to expand its technology portfolio and geographic reach through the acquisition of strategically complimentary companies. Operations in the US, Europe and China provide resources that are close to customers, and the company's global footprint allows it to offer the lowest cost of ownership to OEMs.
The company was founded in 1983 as an engineering consulting firm, developing a low cost load cell in 1985, which lead to an entry in the digital bathroom scale market.
From 1998-2000 the company worked through a series of acquisitions designed to increase the size and breadth of its sensor division, acquiring a piezo film group from AMP, sensor company ICSensors from P+E, and Schaevitz Sensors from TRW.
But the rapid growth of the company came with a price, and in 2002 the company was restructured, leading the board to make the strategic decision to migrate the company to a pure-play sensor company and divest all of the company's consumer business.
During 2005, the company invested $155 million in 12 transactions, which significantly expanded the company's product offerings and geographic reach, while at the same time completing the divestiture of its consumer business.
The company acquired Intersema in 2008 and in 2009 the company completed its acquisition of Atexis and FGP.
Also during 2009, the company opened its new 25,000 square meter facility in ShenZhen, China to serve as the Asia/Pacific Regional Manufacturing and R&D Headquarters.
Today, Measurement Specialties is a leading global sensor supplier to OEMs and end-users, with sales in 65 countries in excess of $250 million.
With a couple of exceptions, the company's financials appear to be sound, with Free Cash Flow at $1.49 per share, Return on Invested Capital above 17%, Total Debt at 15% of Shareholder Equity, and Cash on Hand at $1.61 per share. To us, all of these are positive signs, especially given the economic environment of today.
But as we cited in the full report, there are things that give us pause. For instance, we believe the company's Selling and General Administrative expenses are simply to high at 35% of Sales, just as we are not impressed that 45% of the company’s Total Assets are made up of Goodwill and Intangibles.
In addition, we think the company's 160 day Cash Conversion Cycle simply sux. At 160 days, the company turns its inventory into cash slightly about twice a year, and we view this as a fundamental shortcoming on the part of management.
Admittedly, we are on the fence when it comes to the company’s Inventory at 16% of Total Assets, since in a distress sale, the company would be lucky to get 50 cents on the dollar for its Inventory.
Considering the Inventory and the Goodwill and Intangibles, we were simply not impressed with the company’s Total Assets and note that the company’s lenders may not be either, as reflected in the average interest rate the company paid on its debt.
Management does seem to be closely monitoring the company's debt, currently at $1.58 per share, but we note that while the company is receiving lending for acquisitions and general working capital, the happiest of the happy is General Electric Capital Corporation, the company's chief lender, since during fiscal 2009 the company paid them an average annual interest rate of almost 13.5%.
So while the company's financials appear generally sound, we believe management needs to take their hands from their pants, get their minds out of Arkansas, and start reducing the company's debt.
We reviewed the qualifications of management, which in our opinion is always a subjective effort. What we were looking for were officers and directors with technical backgrounds. While we did find technical backgrounds on many of the company's officers, what was far more prevalent were backgrounds in management and finance.
Typical of what we found was information on the Chairman of the Board of Directors, and the Chief Executive Officer. Both have technical experience and/or education in their backgrounds, but both have made a career in management and finance.
Considering how business has changed over the past 10-15 years, how "world-wide" seems more the norm rather than the exception, we finally realized that while technical backgrounds are of value, backgrounds in management and finance is what will guide a company forward in difficult financial times.
Chairman of the Board of Directors
The Board of Directors is lead by Morton L. Topfer. He has been a Director since January 2002 and was appointed Chairman of the Board effective January 31, 2003. Mr. Topfer is Managing Director of Castletop Capital, L.P., an investment firm.
He previously served at Dell Computer Corporation as Counselor to the Chief Executive Officer, from December 1999 to February 2002, and Vice Chairman, from June 1994 to December 1999, and was a member of the Board of Directors of Dell from December 1999 to July 2004.
Prior to joining Dell, Mr. Topfer served for 23 years at Motorola, Inc. where he held several executive positions, last serving as Corporate Executive Vice President and President of the Land Mobile Products Sector.
Mr. Topfer was conferred the Darjah Johan Negeri Penang State Award in July 1996 by the Governor of Penang for contributions to the development of the electronics industry in Malaysia. He also serves as a director for Staktek Technologies and Advanced Micro Devices.
Chief Executive Officer
The company is lead by Frank Guidone. Mr. Guidone has served as Chief Executive Officer since June 2002 and has been a Director since December 2002.
He was a Managing Director/Principal of Corporate Revitalization Partners, a Dallas-based turnaround/crisis management consultancy firm, from 2000 to 2006, and is still a partner at Four Corners Capital Partners, a boutique private investment firm of which Mr. Guidone is a co-founder.
Prior to forming Four Corners, Mr. Guidone spent 13 years in management consulting with Andersen Consulting and George Group, Inc, where he worked with numerous solvent and insolvent companies, focusing on operational and financial restructurings. He has a B.S. in mechanical engineering from The University of Texas at Austin.
The company has a Market Capitalization of $132 million, an Enterprise Value of $9.44 per share, an Equity Value of $9.50 per share, Shareholder Equity of $10.77 per share, and a Tangible Book Value of $2.09.
Based on a 5 year hold, we believe a Reasonable Value Estimate for the company is $27-$28 per share. With no adjustment for risk, based on our Reasonable Value Estimate, we would set a Buy target at $13 to $14 per share, a First Sell Target at $25-$26 per share, and a Close Target at $28-$30 per share.
On a risk adjusted basis, we would lower our Buy target to the $9.50 to $10.50 range, with all other target prices remaining the same. As a portfolio percentage, this stock would be a 0.5% to 1% position.
Investment Risk Thoughts
In its latest SEC Form10-K filing for fiscal 2009, the company highlights currency conversion as a very large risk and we happen to agree. The world is currently in a vast economic upheaval, which we believe will continue into the foreseeable future, just as we believe that the value of the US dollar will continue to decline.
In addition, we continue to assert that the US economy is not close to the bottom of its current recession, and that US economic growth will be flat to negative over the next 10-12 quarters.
This flat to negative economic growth will continue to weigh on the value of the US dollar, which in turn will have negative impacts on companies trying to repatriate funds back into the US economy.
We also view the amount of interest the company is paying as a substantial risk. While we believe in acquisitions as an avenue for growth, we also believe that an acquisition should not be entered into if it is not immediately accretive to earnings and that all financing costs must be included when determining accretion levels.
In our view, management does not seem interested in following this simple methodology.
While the company's Interest Coverage Ratio remains far above panic stage at 8.6, we note that there was an increase in Sales of 14% from 2007 to 2008 and decrease in Sales of 11% from 2008 to 2009. Certainly the worldwide recession played its part in this decline in Sales. But for those same periods, the company experienced an increase in EBITDA of 18% followed by a decrease in EBITDA of 29%.
This tells us that the acquisitions the company has made, while beneficial over the longer-term, were only marginally accretive to earnings, and, in our opinion, the company's cost of capital was not taken into account prior to the acquisitions being finalized.
Certainly these are very risky economic times, and as we noted, management has, in the past, allowed the company to outgrow itself. But we continue to believe that the cost of doing business can be improved through automation, and that means a measurement, which in the end, is the company's business.
While we see tough economic times ahead for the economies of the world, we continue to believe that thoughtfully considered investments, held over the longer-term will reward the patient investor.
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