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

Forward PEG Ratio:

Below is a 2-year forward PEG ratio given the following assumptions:

  • Normalization of revenue from India due to COVID-19 shutdown.
  • Lucintel.com Market Segment CAGR growth forecast of “of 5% to 7% from 2020 to 2025”
  • ELTK continued growing even during COVID-19, and I believe ELTK is in a leading position to seize on the forecast industry growth.
  • Margin expansion since the turn-around should continue, although likely at a diminishing pace as efficiency improvements naturally become more challenging to realize.
  • The 0.46 TTM EPS may increase to 0.64 per share (or more) GAAP operational profit over the next year representing a 39% growth rate.
  • Macroeconomic Factors Favorable to ELTK: CEO Eli Yaffe said, “We also see an opportunity to grow our business in the U.S. market due to the worsening relationship between the U.S. and China. The impact of any trade war between the U.S. and China will also impact the Israeli market since we see U.S. pressure on the Israeli Government to reduce the Israeli Chinese trade activities.” Source: Seeking Alpha ELTK Q2 2020 earnings call transcript.
  • In addition to the trade war, peace in the Middle East may provide an additional factor for growth. The United Arab Emirates and Bahrain recently ended the boycott of Israel, permitting economic and financial deals. This not only lessens risk within the region but also provides further opportunities. Source: CNBC August 29, 2020

2-Year Forward PEG Ratio = 10.8 (P/E ratio) / +20% (earnings growth) = 0.54

As always, one can argue for higher or lower earnings growth, which will yield a different, forward PEG. However, I believe the 20% ascribed to be conservative, given the factors above.

Price-To-Sales Ratio:

Using the Market Cap of $21.6M as of September 22, 2020, and a TTM Revenue of $35.8M, the current price-to-sales ratio is a mere 0.6 indicating ELTK is severely undervalued. A 0.6 Price-to-Sales ratio is low for a growth-oriented company in an industry that is undergoing expansion and has favorable macroeconomic factors moving into the future.

Shareholder’s Equity and Book Value:

Eltek's shareholder equity continued growing since Q1 2019.

Period

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Shareholder Equity $Millions

1,159

5,296

5,824

6,269

6,666

7,556

Growth vs Previous Qtr.

 

4137

528

445

397

890

Percent Growth vs Previous Qtr.

 

457

10

7.6

6.3

13.4

Source Data: SEC 6K Quarterly Filings – Delta Analysis Author’s Michael McGauley

The Book Value Per Share (BVPS) is now over $1.72 per share, which is the highest since 2016 when ELTK incurred losses.

Comparison of ELTK to Companies in the Same Industry

Focusing on companies in the same industry space as ELTK, we see again ELTK is highly undervalued.

Company

Symbol

Market Cap

PE (TTM)

EPS (TTM)

Stock Price / Share $

Sanmina Corp.

SANM

1.8B

17.7

1.50

26.37

Benchmark Electronics

BHE

718M

1,536

0.01

19..49

Celestica

CLS

958M

N/A

-0.03

7.34

Plexus Corp

PLXS

2.07B

18.2

3.90

70.46

Flex Ltd

FLEX

5.4B

60

0.18

10.75

Jabil Inc

JBL

5.0B

131

0.25

33.26

SMTC Corp

SMTX

106M

N/A

-0.10

3.66

Eltek Ltd.

ELTK

21M

10.8

0.46

4.95

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 ...

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Comments

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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.