Tuesday, April 9, 2013

Why I Bought IEHC

Recently I bought IEH Corp (IEHC), my sixth small cap. IEHC is really a tiny company, only $7 mil market cap! I came across this in the value blogsphere and found it very well suited to my style. It is extremely profitable (relative to market cap) and it is trading at net net.

Below is the summary of the financials.

IEHC, like so many of the attractive net nets serve a niche in the US military complex. IEHC makes special electronic connectors that can stand the stress of movement and require little force to install. The company appears to be very good at its product, but it is quite dependent on the military. I think that is one reason the company's price is discounted. Recently the company has tried to branch out to commercial applications, and it now has 31% of its sales in the commercial space.

Because this is such a small company I have very little source of information. The company's website says the business goes back 80 years. IEHC used to be listed on the NASDAQ, but moved to the OTCBB in the 1990s because it was too small. The company has been in the connectors business since the 1990s. It is amazing that a company can make the same type of connectors for so long and be growing so much. But then I think of it, my most common computer problem has been the connections. In fact, recently my computer failed because of a loose harddrive connection that eventually disconnected over time.

The company website says that the company was founded by the forefather of the current CEO Michael Offerman. The company used to be called Industrial Heat Treating Company. Somewhere along the line it changed to making electronic connectors. It wasn't doing that well in the 1990s and the stocks was regularly below the $1 range. The company was sometimes losing money, sometimes making money in that decade. Then starting in the early 2000's sales and profit really took off. The following chart shows its yearly profits.

In 2000 Offerman owned 17% of the company. At that time the company was only worth $0.5 mil! Then suddenly he upped his stake to 41%. Talk about getting control of a company on the cheap! The bet didn't pay off right away but it did a few years later. Virtually all the money in the 2000s went into equity which then is reflected in the stock price. The stock price at the very least follows the net net value. The company hasn't used its cash flow for anything but capital expenditures, paying off debt and for inventory. If the company keeps the earnings up, eventually it will build a cash hoard, then it'll be interesting to see what management does with the money.

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