Littlefuse: Great expectations
Littlefuse, Inc. (Nasdaq:LFUS) is in the process of laying the groundwork for big things to come.
The company manufactures and sells circuit protection and related devices to a global base of customers in the electrical and automotive industries. At a market cap of $788 million, the Illinois-based company has been in business since 1927.
The company’s founder Edward Sundt invented the first small, fast-acting protective fuse that was used to prevent sensitive test meters from burning out. Since then, the company has done everything from developing mission-critical components for NASA to making fuses for General Motors (NYSE:GM). Today some of its major customers include Cisco Systems (Nasdaq:CSCO), General Electric (NYSE:GE), Ford (NYSE:F) and Alcatel-Lucent (NYSE:ALU).
The company operates in three major segments: electronics, automotive and electrical. The electronics segment presently accounts for a little more than 60% of the company’s total sales. The automotive business makes up just under 30% of Littlefuse’s sales, with the electrical segment coming up with the remainder. The company’s sales are well-diversified from a geographical standpoint. Sales to Asia comprise 38% of the company’s portfolio with the Americas and Europe accounting for 37% and 25%, respectively.
The company is coming off a first quarter in which adjusted diluted EPS rose by 28.6% on a 1.4% increase in sales versus the year-ago quarter. On a year-over-year basis, automotive and electrical sales increased 8% and 5%, respectively, while electronics sales fell 1%. Other positive developments that transpired during the quarter were the repurchase of $6.6 million worth of Littlefuse shares, the acquisition of a company that supplies high-current ground fault protection devices and a spike in the company’s book-to-bill ratio for electronics.
Analysts are looking for Littlefuse to finish 2008 with EPS of $1.85 on $569 million in revenues. These numbers would represent 12.8% and 6.1% respective increases over the company’s 2007 results. Analysts are then expecting EPS to grow by another 31.4% in 2009 on a 6.2% rise in sales versus expected 2008 results.
As of Tuesday, the company’s stock price was up 10.41% so far this year. This appreciation compares favorably to the S&P 500, which is down 7.4% year-to-date. Despite this market-beating performance, one analyst still believes that this stock has more room to run. Alexander Paris, an analyst for Barrington Research currently has an “outperform” rating on the stock with a 12-month price target of $45. On Tuesday, shares of Littlefuse closed at $36.67.
“The company has a very aggressive new production effort, which is helping to win new customers and expand the size of the markets it addresses,” Paris wrote in a May 12 research report. “With strong finances, it also has the flexibility to continue its strategic acquisitions to broaden its product line and expand its markets.”
Paris is expecting the company’s expansion to kick into high-gear. “With continuing growth in automotive and electrical, strong first-quarter electronics orders and a higher 1.1 book-to-bill ratio, the company will start showing positive comparisons in the second quarter with management guiding to a range of $0.42 to $0.48, up from $0.40,” he wrote. “Positive comparisons should steadily accelerate beyond that with a very strong year expected in 2009.”
One risk for investors to keep in mind when considering Littlefuse is the potential for the company to be placed at a disadvantage when it comes to the cost of labor. Littlefuse competes against manufacturers that maintain lower cost structures. This notion is especially true with respect to competitors that have more significant offshore facilities located where labor and other costs are less expensive.
Fortunately the company has been taking steps to mitigate this risk. It is currently in the process of relocating several of its production facilities to emerging market countries where it will be able to seek less expensive labor. Littlefuse is also proceeding to condense its 14 manufacturing facilities down to seven.
These initiatives are expected to save Littlefuse big money. “The savings from all of these initiatives will accrue over a three-year period, with an initial savings of $10 million in 2008, $25 million in 2009 and a full annual savings rate of over $30 million by 2010,” Paris wrote in his report.
Provided that the company is successful in completing these initiatives and is able to string together a couple of quarters of strong growth following them, Littlefuse should be able to convince shareholders that there is no reason to consider pulling the plug on this stock.
About the Author
Billy Fisher is a certified public accountant and and freelance investment writer whose work has appeared in Investor's Business Daily and The Motley Fool.
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