Hi all, in the last year since I've been mostly silent, I've received the most inquiries about IEH Corp (OTC:IEHC). I have attended a number of the annual shareholder meetings and today I am going to give an update on how I see things. Note: the text below are
my impressions and opinions and recollection of conversations, take everything in here with a grain of salt. And with that out
of the way, let's dive in.
My impression from the meetings generally aligns
with the market perception.
The company is hitting a
very good spot and things are generally on the up and up.
Just look at the last seven years' revenue numbers below.
The CEO though, constantly reminds us that their customers are
long-term customers and they are slow adopters.
This means that
it takes a long time to bag a new customer but when they do they
stay as customers.
A new customer must design in
these hyperboloid connectors, and once they do they are hard to substitute.
So, sales improvement in this company take time. And one can expect more years
of revenue increase. That said, there is also a limit to how much the company can sell. This is
not a company making technological breakthroughs. Instead, it is a niche provider riding on society's
increasing reliance on technology in more and more rough and extreme environments.
Their technology is not new, in fact it is old enough to be out of patent protection.
Their main customers are the big drivers of our economy: defense, old and gas, commercial
aerospace and the medical field.
So long as the S&P 500 does well, so will the company, provided it can execute.
And execution is the main thing I am monitoring during my yearly visits. The company
of course, has a very long history with a single family, the Offermans, as owner-operators.
Recently, the fourth generation of the family has taken the helm.
I am very pleased with this change.
The current CEO, David Offerman, has taken the helm for three years. In that time, I just
feel things look better to us shareholders. Firstly, the governance wasn't impressive, their
non-executive board members did not even reside near the company and dialed into every board meeting.
With some shareholder prodding, they have added more
conventional and local people for board members.
The previous CEO, Michael Offerman, had also relied on
a small-time accounting firm to do their books and inventory. This firm
was replaced by a related accountant who was also a small operator.
Last year, that accountant left. Incidentally, that second accountant attended the
last shareholder meeting to tell everyone that it was all an amicable break.
As I remember, he said that he liked the job but in the end he felt that he was
too small to handle the task. And so, we are
here today with a more traditional firm Marcum LLP as
accountants.
Shareholders in past meetings have also expressed concerns
when retained earning for grew several quarters as IEH had good numbers, but
the value all just went to more inventory, instead of more cash.
Furthermore, in the last meeting one shareholder pointed out that the company wrote off $400k
in inventory for 2019, whereas was it was only $200k for 2018.
So many shareholders are looking at the inventory and pressing for improvement.
On the positive side,
in the last shareholder meeting I heard that the company
was moving to SAP software. I also noticed the company hired a new, and much younger, controller.
And the
new controller just happens to specialize in SAP. I would expect that with this and the accounting changes
we will see improvements in inventory controls and hence better margins.
So with the new CEO in this fourth year, I am watching for inventory levels and margins.
My best scenario
is that inventory stays flat and there are no significant write-offs, and
margins continue to improve. The CEO used to be in charge
of sales and clearly has done a great job in the sales department. By showing better control of
inventory and margins he will be
able to keep up the earnings growth. In the last seven years that I have owned this stock, I have seen
annual EPS go from $0.63 to $2.15.
Of course, as most people know, the unusual spike in sales last year was due to a single
customer order. That customer had decided to switch to hyperboloid from a cheaper technology.
But no single customer contributes more than 14%
of revenue, so even if this customer cut off all future orders, the company is still
growing at a goodly pace.
| IEHC |
| Price | 17.40 |
| Shares (M) | 2.32
(2.74 fully diluted) |
| Equity (M) | 26.20 |
| Earnings TTM | 3.71 |
| Marketcap (M) | 40.60 |
| ROE | 14.1 |
| PE | 10.9 |
| PTBV | 1.55 |
The previous year spike also contributed significantly to operating margins. The operating margin
for the last five years are 20%, 16%, 14%, 19% and 27% in 2019. Other than the previous year,
the company has never achieved margins over 20%. If the company can be a bit more consistent and keep the margin
say, at 23%. I would feel confident that things have really changed to take this company to the next level;
the CEO has indicated that he wants to take the company back on to the Nasdaq someday.
And so, having weighted all these
thoughts, I feel that the company at $17.40 today is about fairly priced. I know the stock was at a high of $25, reflecting the rich valuations of stocks everywhere. But I feel IEHC has to have another good year, maybe not as good as 2019, to deserve a price over $20. That said I did not sell at $25 because there is just too much upside. Like I said earlier, one really has to be patient with this stock. And if the stock drops under the $14 - $13 range, I definitely will start buying more. At $12, I would back up the truck!
