E Eltek Ltd.: With Turnaround Completed, This Deep Value High-Tech Manufacturer Is An Intriguing Growth Story

Infographics Depicting Framework of Value and Key Factors to Consider

(Click on image to enlarge)

FrameworkOfValueToConsider

InfoGraphic Source: Author's - Michael McGauley

(Click on image to enlarge)

InfoGraphic Source: Author's - Michael McGauley

Financial Results Supporting Company Financial Strength

On August 12, 2020, ELTK reported outstanding second-quarter financial results with 0.16 EPS GAAP operational profit. Additionally, topline growth YoY was 11% ($8.2M Q2 2019 to $8.8M Q2 2020)

CEO Eli Yaffe said: “Our revenue in the second quarter of 2020 rose to $8.8 million from $8.2 million in the second quarter of 2019. Revenues for the six months of 2020 were $17.9 million, compared to $16.9 million in the first six months of 2019. This growth is a result of 11% growth in sales to customers in Israel and reflects YoY growth in sales to defense segments in the [contract electronics manufacturers].

Our revenue from the defense sector and contract electronic manufacturers grew from $13.8 million during the first half of 2019 to $15.3 million in the first half of 2020, 11% growth YoY. The medical sectors contribute 9.7% of our revenue during the first half of 2020, representing 4% growth YoY.” Source: Seeking Alpha ELTK Q2 2020 earnings call transcript

ELTK delivered an operating profit and a net profit for six consecutive quarters and a YoY operating profit that increased to $1,421,000 for the first six months of 2020 from $440,000 for the first six months of 2019, a ~330% increase. While a 330% growth rate is not sustainable, the fact it happened despite COVID-19 is relevant, and I believe it is a testament to ELTK’s strength. Source: SEC Filings for Q1 2019, Q2 2019, and SEC Filings for Q1 2020, Q2 2020.

Details of ELTK’s Financial Improvements

CEO Eli Yaffe said, "…continued improvement in production efficiency that is evidenced in our improved gross margins and operating profits. Our diversified end market allowed us to grow revenue YoY despite the weakness in Indian markets."

Additionally, SG&A expense savings helped their bottom line. Expenses went from $1,249,000 in Q2 2019 to $1,095,000 in Q2 2020. These changes were not short-term cuts at the expense of long-term growth as Eli said "...so far, we have financed our growth strategy by our positive operating cash flow and our own internal resources. During 2020 and 2021, we plan to increase our investment in new equipment and expansion of our facility and infrastructure to support our long-term sales growth. The increase in our top line 2020 reflects the continued market recognition of our high quality and reliable products, mainly in the flex PCB sectors." Sources: SG&A expenses SEC Q2 2019 6K filing and SEC Q2 2020 6K filing

Analysis

The 1-year stock price chart clearly shows an up-trend in price. However, given the GAAP operational EPS doubled from 0.08 to 0.16 cents I believe ELTK remains undervalued.

(Click on image to enlarge)

InfoGraphic Source: Chart Yahoo Finance, Comments and Annotations Author's - Michael McGauley

Financial Metrics Supporting Undervaluation Analysis

Current and Forward PE Ratios:

ELTK is currently trading at a 10.8 PE-based on Trailing Twelve Months (TTM) results. However, given the latest 2020 Q2 profit of 0.16 per share and growth potential, I believe the forward PE would be far lower. Hypothetically, if ELTK continues delivering 0.16 per-share earnings, they will earn 0.64 per share GAAP operational profit over the next year, without considering growth. Given the current stock price of $4.95 on September 22, 2020, the Forward PE is 8, assuming everything stays equal. Provided my investment thesis is correct; this forward PE would be even lower than 8 when factoring in growth and recovery from weakness in India’s revenue due to COVID-19. I do not know any other world-leading, growing, and operationally profitable tech companies ascribed a PE as low as ELTK’s.

View single page >> |

Disclosure: I am long ELTK, and I own 5%+ of the Company as filed in schedule 13D with the SEC. Information presented in this article is my own opinion and is for informational purposes only; it ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Michael McGauley 2 months ago Author's comment

I'm happy to see so many people found my analysis thorough and insightful. Yes, I'm not a bot.

For a recent 3rd-party analysis, here you go. The article agrees Eltek's fundamentals "have legs."

seekingalpha.com/.../4371920-elteks-improving-fundamentals-legs

Terrence Howard 2 months ago Member's comment

Thanks Michael, unfortunately that article is locked to subscribers. Shareholders Unite, any chance you'd be willing to share your thoughts on #ELTK here?

Old Time Investor 2 months ago Member's comment

I agree, this stock is undervalued and friendly to shareholders. Certainly worth a closer look!

Danny McGuire 2 months ago Member's comment

Wow! Another comment from someone that has not done so in 5 years! This time on the bull side! People do your DD and skip the comments section on this site. At least, the articles on the site are worth reading.

Katy Lin 2 months ago Member's comment

Wow, you've acquired quite the stake in this company haven't you?! You must really believe in $ELTK.

Danny McGuire 2 months ago Member's comment

First comment in 5 years! How fake is this? What is going on here? Thank you Currency Trader for making me do more DD on the commenters on this website.

Dick Kaplan 2 months ago Member's comment

Very interesting and convincing, Michael McGauley. Though I do have concerns about possible bias. Do you cover any other stocks? The only articles you seem to have written are about $ELTK.

Danny McGuire 2 months ago Member's comment

The author is sharing his investment thesis and reasoning. It is his sole prerogative to write what he wants and when he wants it. He does not need to cover any other stocks. He is his own man.

Edward Simon 2 months ago Member's comment

Mike, great article. Thanks for the in-depth analysis. As with many Defense related stocks, companies like these can suffer from ups and downs, based on anticipated vs actual business, as well as inefficiencies driven by specific customer specifications. It is a question of management. Hopefully, what you report is true with regards to Eltek. Only time will tell.

Danny McGuire 2 months ago Member's comment

All companies "can suffer from ups and downs, based on anticipated vs actual business." Not a very insightful statement. I have no idea what you are talking about in regards to " inefficiencies driven by specific customer specifications." ELTK is in the niche high end PBC market. Meeting customer specs gives the company margin growth as seen in the past few quarters along with improving customer retention. Questioning the honesty of the author is the worst part of your banal comment. You do realize that the author is a verifiable real person, unlike you.

Currency Trader 2 months ago Member's comment

The author may be a real person, but are you? Who are you exactly? Unlike everyone else on this thread, you have no comments on this entire site, other than this article. It seems you registered specifically to jump to the defense of an author who, one would think you don't even know. Or do you? Perhaps you are the author using a different name? I noticed he did not respond at all.

I actually found the article very convincing but your comments are making me highly suspect

Danny McGuire 2 months ago Member's comment

A person that goes by the username, Currency Trader, is asking me who exactly I am? A user with only two comments that are dated 2 to 5 years ago that now only suddenly appears today on a microcap stock and questions my integrity? I find that laughable and highly suspect.

BTW, I have traded ELTK off and on over the years. I came to the website because there was a new article on ELTK and I did not even know this website existed so I decided to give it a try. I am not the one that attacked the integrity of the author, which could be construed as libellous. It appears that you like going down crank rabbit holes yourself with your other questions. Again, highly suspect.

David M. Green 2 months ago Member's comment

Bullish on $ELTK.

Kurt Benson 2 months ago Member's comment

Very thorough analysis.