A Potentially Perennial Net/Net

 | May 16, 2012 | 1:30 PM EDT  | Comments
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All you need is a little pullback, and potential value will be revealed. That's what we are starting to see as the markets grapple with more turmoil in Europe, none of which should be a great surprise. But when it happens, the more marginal names get jettisoned first and, typically, get slammed harder. That's when I start to see new life breathed into some of the deep value techniques I utilize.

In Monday's column, I discussed that Ingram Micro (IM) was again trading below net current asset value (NCAV). Today, we can add Benchmark Electronics (BHE) to the list. While not as big as Ingram in terms of market cap, Benchmark is still decent-sized for a net/net, with a current market cap of about $825 million. It's also profitable, trading at just under 20x trailing earnings. That may not seem cheap to a value investor, but it's acceptable when you consider that the typical net/net is in the red, struggling to recover.

Benchmark isn't struggling. Last quarter revenue rose 10% and the company beat earnings estimates handily. Benchmark is expected to generate $2.64 billion in 2013, and earn $1.44 per share, which puts the forward PE ratio at just under 10. (That is, if you believe the consensus, of course).

Benchmark shares have endured a 24% haircut the past three months, and now trade at 0.99x NCAV, and 0.76x tangible book value per share. This company has maintained a solid balance sheet for as long as I've been following it, and not much has changed. Benchmark ended its latest quarter with $257 million in cash and an additional $25 million in long-term investments (auction rate securities) for a total of $4.90 per share in cash, and just under $11 million in debt.

This is not the first time Benchmark has traded below NCAV, and it may not be the last. You occasionally see companies that become perennial net/nets, seemingly always trading at relatively low multiples of NCAV. That's not typically a good sign: It means that what appears to be a very cheap valuation is simply how the market prices a stock. In recent years, we've seen several technology related stocks such as Ingram, Tech Data (TECD), and Benchmark bouncing on and off the list. I'm not ready to declare any of them perennials just yet, but this is something to be aware of.

Perhaps it's time for Benchmark to shake things up a bit. With all that cash, and no debt, the company should consider initiating a dividend. Similar to Ingram, that might get Benchmark more attention.

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