Trying to sort SGMA out- pulled out my info to share.
I wrote:
I missed a short sell opportunity. Sigmatron(SGMA) was taken out and shot today. The stock had doubled from last fall. They have one major customer who makes Carbon Monoxide detectors. Forbes last month came out with an article and said that the things don't work. Also, these devices have almost all their sales in late fall and early winter. So the fall/winter quarters are the strongest sales we should see from the company for a while(the latest Q earnings are due out next week). I looked for a news release, but didn't find one, but it wouldn't surprise me if some analysts downgraded this stock today based on weak earnings projections for the next two quarters. From what I can tell this stock is favored by some mo guys who follow IBD buying principles.
You replied:
So at 24 you have a forward PE of about 20, does that seem outlandish in this market? For a company that is posting double digit earnings increases quarter over quarter? This particular industry segment is forcasting annual growth rates of 20 percent. Also to your point which was made in an earlier post about the CO detector being the only business and not working. I suggest that you obtain a copy of the annual report. The contract they established with Nighthawk was 3 year inclusive starting in June 1995, and sales of the product were indeed a signifcant product for at least the 1997 fiscal year. But the only product? Let's see, consumer electronics, lighting to automotive &
sign industry, telecommunications, automotive electro-luminescent technology, gaming, and oh, let's not forget fitness, yeah my health club just recently replaced all the treadmills with Life Fitness products. bp
My response
I think you are awfully confused, and seem to be working with old info on Sigmatron. The annual report contains info almost a year old, since the fiscal year ends on April 30. The latest 10Q contains the following statements:
During the first six months of fiscal 1997 net sales increased 71% to $48,176,341 from $28,106,953 for the comparable period of the prior year. The increase in net sales was due primarily to sales to Nighthawk Systems, Inc. ("NSI"), which contributed approximately $16,794,081 in net sales for the six months ended October 31, 1996. The Company began manufacturing for NSI in August 1995, and NSI's market is an emerging market which could lead to volatility in the forecast. The Company anticipates NSI will account for a significant percentage of the Company's net sales in fiscal 1997. Sales to NSI are expected to be seasonal due to the nature of the product. The volatility of NSI orders may cause the Company's revenues and earnings to fluctuate significantly.
My analysis
So according to this, over 35% of the sales are due to one major customer who in turn is dependent on one product. Furthermore they admit almost all the growth is coming from this one product. The SEC I believe requires that they identify major customers who contribute more than 10% of sales in their filings. I don't see any other major customers identified. I never said they were the only customer! In fact in my later post, I said that management is moving to diversify rapidly, and I consider that a sign of smart management!
The next question is "What is the future look like for this product?" From Forbes magazine article published on the biggest smoke detector and CO detector company, First Alert, I got this info:
The trouble is, First Alert's new detectors-and most of its competitors' detectors-don't work any better than the old ones. A study by the Gas Research Institute of data collected by suburban Chicago fire departments indicates that 83% of the alarms triggered by sensors built to the original UL standard were false. For products built to the new standard, the figure rose to 87%. Worse, in another GRI study, 9 out of 24 UL-certified alarms failed to go off when they should have.
The UL standard doesn't require the devices to pass the required test twice. There's no way to tell if the sensors are still working properly. The test buttons are merely a check on the circuitry and the battery.
Last year the GRI helped sponsor stricter product standards. Released in October, the new standards require two key additions: Alarms must be insensitive to safe levels of carbon monoxide, and detectors must include a mechanism that proves sensors are actually working.
Wendy Gifford, senior product manager at First Alert, says her company will not test its detector to the new standards. But in October the U.S. Consumer Product Safety Commission-a strong proponent of CO detector installation-effectively endorsed the stricter standards.
The first company to meet the new standards will be AIM Safety, a Toronto Stock Exchange-listed company based in Austin, Tex. Already, Michigan Consolidated and Delmarva Power & Light, among other utilities, are selling AIM's detectors; and Lennox, the gas-furnace maker, sells AIM detectors under its own name as well as the AIM name.
From Forbes January 13, 1997 article.
So from this, only AIM Safety is currently meeting the new standards, so Nighthawk must not be!
Basically Sigmatron has a significant risk because their strong dependence on one shaky product. Therefore it should sell at a discounted forward PE to the ECM sector forward PE of about 12!
Now I happen to agree that the ECM sector PE is ridiculously low. Thats why I started this thread and why I am investing so much time and money in this sector. Earlier on this thread I gave a group of 4-5 ECM companies that in the aggregate is growing 30+% per year and seem to be trading at an average of 10 times forward earnings and a PSR of 0.65.
So why would anyone pay 20 times forward earnings for a company that carries the risks that Sigmatron does?
Lastly, the stock did not sell off by "long term investors being gang raped by short sellers". It dropped far too rapidly with no sizable upticks where a short seller could short! No, the selling started in reasonably large blocks, and then fed on itself as people's stops were hit and as the mo boys fled. The buying today is in blocks of less than 2000 shares; the only larger block so far (5000 shares) was a sell on a downtick. No, my guess is the shorts are selling before the big drop, covered yesterday, and probably are shorting again today when the stock nears 20.
I still think my suspicion about a bunch of mo players and IBD people drove this stock up into the 20s, and that their stops got hit in the big drop, is correct.
Finally, let me caution you about the same thing Motley Fool is cautioning their readers; I suspect the big sellers who kicked the slide off had some pre-knowledge of next week's earnings report. I would at least wait until I saw the report, and heard management's discussion, to enter this stock, if you are still interested.
Good Luck, and hoping I'm wrong for your sake, Paul. |
