LFUS - Littelfuse

[Broeb22]

Does anyone have thoughts on this company? I didn't see any write-ups on VIC or SumZero, but the company has a decent track record. In particular, I've been trying to identify businesses that operate using Lean principles (as opposed to talking about it), in line with Cliff Ransom's research approach.

 

This seems like a candidate for further research after a couple hours of reading, but would love to hear the bear argument from someone. Attractive aspects to me:

 

Management with long tenures - only 3 CEO's since IPO in 1991

Reasonable leverage ~2x Net Debt / FCF

Demand for electrical components is stable

Electrical components are small cost, but high value (if the part doesn't work well, the machine doesn't work well, so there is less incentive to switch to a slightly cheaper alternative)

Clearly stated goals in Annual Report; company revisited 5-year goals set in 2012 to see if they achieved their goals, which demonstrates accountability and consistency

Mgmt. compensated on sales, EPS, and cash from operations; My only wish is they had some type of return on capital metric. All 3 measures can be increased by doing bad acquisitions at high prices/low ROICs

A stated reliance on Lean principles; Not sure how serious they are about these, but they do talk about the number of Kaizens completed and other jargon

 

 

What concerns me:

Some of Company's end markets are cyclical (auto and commercial auto) which implies we could be at peak sales/margin levels

High capital intensity relative to similar companies (4-5% vs. 2-3%)

Risk of poor acquisitions

 

 

 

 

[educatedidiot]

My bigger concern would just be valuation.  LFUS historically has traded more in the 5-7x EV/EBITDA range, but that valuation has really expanded a lot over the last few years and now sits over 16x EBITDA:

http://www.rocketfinancial.com/Charts.aspx?fID=2607&r=3650&t=4

 

Perhaps others more familiar with the business can comment, but I don't think there's really been a major change in the business that would justify such a sharp re-valuation higher.  Furthermore, I'm not sure that the long-term organic revenue growth prospects in the business warrant such a high EV/EBITDA valuation.

 

Also the magnitude of the cyclicality in the business (as you allude to) is not to be underestimated.  Profit margins were more than cut in half in the great recession:

http://www.rocketfinancial.com/Financials.aspx?fID=2607&p=2&i=0&pw=85989&rID=1&tID=1&stID=1&segID=-1