March Idea of the Month: Rich, Plain, and Profitable

By Travis Johnson, Stock Gumshoe, March 23, 2012

This month’s idea is plain and boring, at least until you look under the hood a little bit. It’s a small cap (but not too small) that is profitable, with a very diversified group of customers and a >yawn< boring suite of products (at least, for those of us who aren't electrical engineers). But they're also cash-rich to a ridiculous degree, they pay out some of that cash as a dividend, and they're profitable and very much levered to the overall growth in complexity in consumer and industrial products. This month I'm urging you to take a look at AVX (AVX), which is an electronics component company that's controlled by Japanese electronics and ceramics giant Kyocera (KYO). What caught my eye with AVX is the dividend growth, the low PE ratio, and the unexciting nature of the business (they have dozens of product lines and several key customer segments, so they have some stability even in shaky times for particular sectors -- like solar power right now), but what got me to lean over my keyboard and start to really pay attention is their cash hoard. AVX currently has more than a billion dollars in cash and equity investments, with $860 million of that in actual cash and short term bonds, and no debt to speak of. The company trades at exactly book value right now, and essentially none of that is "intangible" book value -- to the contrary, they have accumulated depreciation of over a billion dollars to offset their property, plant and equipment and while I haven't inspected their offices and facilities around the world it seems almost certain that the value of their assets, including a buildup in inventory that has investors a bit concerned, significantly outpaces the market valuation of the company (which is $2.3 billion). So why is it so cheap? Well, that's the rub -- and that's why, though I think AVX is a compelling idea right now at current prices, and think the downside is very limited, I don't expect the shares to shoot to the moon in the short term. This one will likely require some patience. There are two reasons for the cheapness that I see -- one is their corporate structure. AVX is majority owned by Kyocera (70% or so), and they've had this cash hoard for quite a long time and have done nothing substantial with it other than ...

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