You’d be forgiven for overlooking Cemtrex (Nasdaq: CETX) in your portfolio because it’s not the most famous electronics manufacturer out there. It’s currently engaged in a minor takeover skirmish for Key Tronic Corporation, a rival maker of electronics. But whether or not the acquisition goes through, the CETX ticker is likely to rebound soon, and deliver reliable, appealing gains over the long term.For more information on the Cemtrex (Nasdaq: CETX) bid to acquire Key Tronic (Nasdaq: KTCC) click here
Cemtrex (Nasdaq: CETX)is a small cap diversified industrial and manufacturing company focusing on niche services within the Electronics Manufacturing Services (EMS) and Industrial Products & Services (IPS) sectors. Its industry fundamentals are solid, and in fact, the EMS industry looks poised for some consolidation, which could be beneficial to CETX shareholders.
Cemtrex (Nasdaq: CETX) shares have been in bear territory since February. It emerged from a short attack in the spring only to get more unwarranted bad press after Key Tronic management issued some nasty press to try to stave off the takeover, which remains pending.Cemtrex (Nasdaq: CETX)is currently trading at $2.84, down from a high of $8.05 in January.When you take into account a variety of factors regarding Cemtrex’s foundation and history, there is a very compelling argument that the manufacturing company is destined for growth over the next 18 months whether or not the latest acquisition goes through. These factors include Cemtrex’s historical growth patterns, its revenue diversity, the tailwind in the sectors it competes in, the effectiveness of its management team, and the diminishing impact of short sellers of its stock.
Strong Historical Growth Patterns
The historical growth pattern for shares of Cemtrex (Nasdaq: CETX) shows an intriguing trend; whenever it faces a sharp inflection in share price, it later rebounds for about an 18-month period. It has repeated this cycle three times in the past seven years.
But why does this matter? Well, Cemtrex is now in month 8 of its “valley” which began in February. The fundamentals of the company are much stronger than the share price suggests. Which means that, if history repeats itself—in the case of Cemtrex, it has done so in all three of its dips since 2010—investorsmay expect CETX share price to rebound and continue to rise steadily over the next 18-month period.
Cemtrex has shown Diversification for Long-Term Growth
The Farmingdale, NY-based company has a diversified range of profitable, niche businesses including the design, manufacturing, and servicing of environmental control and air filtration systems for various industries and utilities; emissions monitors for industrial processes; and manufacturing logistics.
Cemtrex (Nasdaq: CETX) has strategically diversified its lines of business both through a successful M&A strategy and through organic growth, particularly in emerging markets. Over the past five years, the company has grown at a 33% compound annual growth rate, driven by this combination of organic sales growth and strategic acquisitions. In the face of this diversification and rapid growth, management has kept a steady hand on the till generating 24 straight quarters of profit through 2016. About 70 percent of its revenues come from markets outside the US. Across the EMS and IPS sectors, the company has lines of business in:
1. Medical
2. Industrial
3. Automotive
4. Wearables
5. Telecommunications
6. Home automation
7. Appliances
For more details on Cemtrex (Nasdaq: CETX) business click here.
Cemtrex (Nasdaq: CETX) Electronics Manufacturing Services (EMS) segment has experienced significant growth over the past two years. The EMS segment manufactures extremely complex electronics which deliver high gross margins in a diverse variety of industries including wearable devices, automobiles, telecommunications, industrial products, appliances, home automation, industrial automation and medical devices. Many of the company’s customers in these industries are increasing which is likely to continue propelling organic growth.
The recent Periscope GmbH acquisition gave the Company, market share leadership in the EMS sector for the EU market. Located in Germany, Periscope is focused on electronic manufacturing services primarily for the major German automotive manufacturers, including Tier 1 suppliers, as well as for industries such as telecommunications, industrial goods, luxury consumer products, display technology, and other OEMs. With the 35-year old Periscope in its quiver, Cemtrex is now a leading EMS company in Germany, ranking among the top 15. The European EMS market is expected to achieve a 10.1% CAGR from 2011 to 2017, according to German economic development agency Germany Trade & Invest. Cemtrex management anticipates substantial synergies with its existing portfolio of companies and cross-selling opportunities to existing and prospective customers. Periscope also providesCemtrex (Nasdaq: CETX) a strong footing in the dynamic automobile industry, which is undergoing rapid technological change with electric vehicles.
Cemtrex’s industrial services business offers a diverse range of equipment and services including: plant maintenance, industrial air filtration, and environmental control equipment, for a variety of industries such as: chemical, natural gas, pipelines, cement, steel, food, construction, mining and petrochemicals. Cemtrex not only makes the equipment these companies will need, but it is also poised to benefit from services it can now offer thanks to its acquisition of advanced.
Industrial Services (AIS), a 30-year-old broad-based industrial services company that has deep experience in installing and maintaining equipment for industries including: printing, packaging, refineries, chemical & automotive plants. Since its inception in 1984 AIS has been well regarded as a market leader in installing high precision equipment in a wide variety of industrial markets such as automotive, printing and graphics, industrial automation, packaging, chemicals and many others. The AIS acquisition helped Cemtrex gain grown in the massive North American market.
AIS with its own heavy equipment and technical experts can install high precision equipment at packaging, automotive, & printing plants and offer regular maintenance services to its customers as more and more companies are outsourcing plant maintenance. Due to tremendous growth in online purchases, numerous packaging & shipping plants are being set up nationwide which thus providing growth opportunities for AIS business. The addition of AIS, also allows Cemtrex to compete collaboratively for larger opportunities by providing contracting and installation services as part of its existing equipment sale contracts.
Strong Industry Tailwind
Market research firm New Venture Research predicts the EMS industry that Cemtrex competes will reach a total of $621 billion in 2019, up from $460 billion in 2014, as more companies outsource electronics manufacturing. CCS Insight projects the wearable device market will reach $34 billion by 2020 and another research firm, IDTechEx, anticipates that it will continue to $75 billion by 2025.
Looking at some of the other markets Cemtrex (Nasdaq: CETX) operates in, Research and Markets estimate that the industrial control and factory automation market will reach $202.4 billion by 2020, which represents a 6.73% CAGR. Smithers Pira forecasts that the global packaging market will grow at an average 3.4% per annum from 2014 to 2024, reaching $1.1 trillion – details shown here
The Internet of Things (“IoT”) market spans both the EMS industry and the industrial products market, as devices for the consumer and the factory floor become smarter and connect to the cloud. Concerning the IoT trend, Cemtrex is executing essential initiatives in home automation, wearables and medical devices which may benefit from the tailwind of IoT growth, which according to some analysts is expected to grow from $800 billion today to $1.4 Trillion by 2021.
Across these industries, Cemtrex management indicates it is focused on building relationships with market leaders, positioning them to profitably scale as these market leaders do the heavy lifting of R&D and marketing to increase sales. In 2016 they manufactured more than 300 different products for more than 50 customers.
Please reference the CETX investor portfolio – click here.
Strong Management Team
The management team at Cemtrex, led by CEO Saagar Govil, has proven widely effective in implementing their growth strategies. Govil started as an engineer at the company while it was on the verge of going out of business more than 10 years ago. Learning the ropes starting from his engineering position, Govil climbed the ladder up to CEO of the company and, after taking the wheel, unlocked a level of unprecedented growth in Cemtrex’s history. Over this period under Govil’s leadership, the company grew from 10 to 600 employees. Further, CETX shares racked up 24 straight profitable quarters between 2012 and 2016.
Cemtrex has recently been named by Crain’s New York as this year’s top 50 fastest growing companies – click here. Cemtrex was also on Deloitte’s Fast 500 list 3 times in the last 5 years.
Govil, like any business leader, doesn't mistake free. However, management is rather transparent with identifying their mistakes and indicating that they are learning from and adjusting to them. According to Govil, “you are going to make mistakes and will learn the hard way. But that's the name of the game. You realize you have to step up your game and get better."
Management has executed several accretive acquisitions and demonstrated the ability to grow in international markets, which is impressive for a smaller cap corporation.
The incentive structure for management is closely aligned with generating shareholder value. Insiders’ ownership of roughly 45% aligns insider interests with those of public shareholders and supports management’s demonstrated a commitment to building shareholder value.
Rebound from a Short Attack
Like many smaller cap stocks CETX recently took a beating in the stock market from short sellers looking to cash in on unfounded negative Cemtrex News. The most recent short attack was triggered by an inflammatory article published in February by a veteran short seller, which presented false allegations regarding accounting professionals affiliated with Cemtrex. The blogger's dodgy report causedCemtrex (Nasdaq: CETX) stock price to quickly drop in value, allowing him and others to allegedly benefit millions from short positions on its stock.
The short attack falsely claimed that the auditor for Cemtrex’s 2014 and earlier financial statements was defunct at the time of these reports, which it was clearly not. The blogger, and made numerous false statements regarding Cemtrex’s current auditor, Bharat Parikh Associates, suggesting that a disbarred accountant ran the firm. In fact, Cemtrex’s accounting firm is a PCAOB recognized and compliant auditing firm, in good standing in all respects. Cemtrex also has several million dollars of commercial bank loans outstanding with major commercial banks both in the United States and Germany. As many investors know, obtaining a loan from a bank is not possible without substantial diligence by any banking institution. Cemtrex filed a lawsuit against Pearson for libel, noting that he had taken short positions in CETX and stood to gain from the negative press he curried. The company is seeking total damages of $170 million.
The short attack also claimed that “millions” were paid to promoters of the stock but the author never provided any evidence for these “millions” paid. He continued to assert that management sold several million dollars of stock during this period in a pump and dump scheme for which there was again little evidence. Alternatively, subsequent filings by the management suggest that this author was blatantly misrepresenting the conduct of management and that were no significant insider shares sold if any. Another important point to consider is that both the Company and the CEO have made insider buys over the past year.
The article had the effect of artificially depressingCETX shares for several months, but the effect is now wearing off as investors collected themselves and analyzed the misleading report and Cemtrex’s lawsuit. The stock may rally further as a result of continued diminishment of the impact of the short attack.
Summary
Cemtrex (Nasdaq: CETX) shares have been pummeled by a short attack and unfair bad press from an unwilling acquisition target. However, its historical trend shows a rally that can extend for about 18 months is likely. The company has a well-diversified product line that is positioned to benefit from major trends like the Internet of Things, wearables, electric vehicles, and the need for industrial emissions-reduction equipment due to the Paris climate accord. Management has deep experience and is aligned with shareholder interests. If you’ve overlooked CETXstocks in the past, now is the time to look a lot more closely into today’s growing stock market.
