Today's column is a follow-up to Wednesday's on the theme of activist involvement in a deep value name. This time it is focused on Benchmark Electronics (BHE), a former net/net (company trading below net current asset value) and current member of my "Profitable Small-Caps With Cash" tracking portfolio. (In fact, it is that portfolio's second worst performer, down about 2% since inception.)
Benchmark has appeared on a bevy of my value-driven stock screens for several years. When you see that type of a situation, where a stock is perennially "cheap," you have to wonder whether it is indeed cheap, or by nature happens to trade at what appears to be a cheap valuation.
In Benchmark's case, it seems to always be trading at a relatively low price/earnings ratio. Currently trading at about 10.5x trailing earnings, and 12x 2017 consensus estimates, BHE can't seem to rise above that P/E multiple level. Investors have not been willing to pay more, and that could be due to the fact that revenue has shown little growth over the years. While the company is profitable, net margins are also on the low side (3.8% for 2015).
One of the main reasons I continue to run into Benchmark in my research is the strength of the balance sheet. Benchmark currently trades at just 0.86x tangible book value per share. In addition, the company ended the year with $466 million, or nearly $9.30 per share, in cash and $235 million in debt. That debt is new; historically, the company has had a negligible amount, but took on a $230 million term loan in November to finance the acquisition of Secure Technology.
Enter activist Engaged Capital, a 4.9% owner, which in late January nominated candidates for Benchmark's board of directors. The firm has been critical of Benchmark in two areas: inefficient use of the working capital, and the board of director's "undisciplined and unsophisticated approach to capital allocation." In essence, the activist believes there's too much cash on the books, which could be better utilized by Benchmark. Engaged has also been critical of the Secure Technology acquisition, which it believes Benchmark overpaid for.
For its part, Benchmark countered Engaged's claims in a letter sent to shareholders on Tuesday. Then, on Wednesday, independent proxy voting advisory firm Institutional Shareholder Services (ISS) came out in favor of two out of three of Engaged's director nominees. Benchmark reacted to the ISS recommendations in a press release yesterday, and I would not expect the war of words to end here.
What we have now is the makings of a good old fashioned proxy fight, one that will ultimately come to a head at the May 11 annual shareholder meeting.