Vtech Holdings $VTKLF
Ring, ring... hello!
Chances are, the name sounds familiar if you either have small children around or if you have recently awaken from a coma only to find out that people no longer have telephones in their homes anymore…
What do they do?
Best known for their wired/wireless phones and kids educational toys, Vtech operates globally in lots of other semi-related industries such as electronic contract manufacturing segments. This is not a terribly straight forward business but essentially they offer turnkey manufacturing, design, product testing and other related services to Original Equipment Manufacturers (OEM) in the electronics industry. Offering services from engineering, supply management, technical support and manufacturing, they seem to run the gamut. Founded in 1976, they have been in the business before the business well… was really anything like this business.
In North America, the educational toy segment accounts for over half of the revenue while the second largest segment comes from their wireless phones lines at around 25% and the remainder from their electronic contract manufacturing. In the other markets globally, the percentages of revenues differ such that the manufacturing segment is a slight majority of revenues. In all, the revenues stand at just over a billion us doll-hairs.
Do they make money?
Yes. They have and likely will continue to make profit. Their gross profit margins have sustained around 30% while the top line revenues have very slowly increased over time. The operating margins have slowly decreased as the business matures however, there is still free cash flow each year.
Are there reinvestment opportunities?
There are opportunities to grow into more markets and expand into related industries but these businesses are mature (what would the growth rate for cordless phones be at this point?). The management has been paying out a large portion of the cash flows to investors via dividends which is a sign that reinvestment into the business is just not there.
Is there a risk of a blow up?
This is a mature business. It is not heavily levered with an enterprise value at around the same as the market cap of 2.4 billion or so. The debt to equity is low at 0.2 however they do have enough cash to cover the debt they currently hold so not a big concern in any case. The nature of the business is somewhat tied to the global economy but not in a commodity sense so there is little risk of a boom-bust cycle destroying the business.
Is management sketchy?
There is no signs of weird business deals or strange acquisitions that would raise significant red flags. The business has been consistently producing free cash flow without significant growth and has focused on paying out a large amount of that to its shareholders. Their capital expenditures have been consistent over the past 10 or so years and the profits from each year has no problem keeping up.
Does it have a moat?
It does enjoy a recognizable trusted brand in its children’s educational toys (Leapfrog, Vtech, etc.) segment and a lot of people would recognize their phones as being of sound quality. Based on the gross margins, it would seem that this is helping with pricing power. I doubt the same could be said for the manufacturing segment although in some areas as they have expertise in a niche area, there could be some evidence of a moat. In any case, it is not a terribly strong moat and not one that would be called a “wonderful business” by old white men from Omaha.
Is it cheap?
Yes, mostly it is. Most metrics that are easily measured would tell you that this is a relatively cheap stock. With a PE of 12, a EV/EBIT of around 10 and a price-sales of just over 1, it is around its long run average compared to itself and cheap compared to the current US stocks listed on the major exchanges. While this one may at first look cheap and have an attractive dividend yield, just remember that this isn’t a steadily growing software business with recurring revenues and a TAM the size of Jupiter…. its kids toys, cordless phones and various manufacturing services in various places on this planet.
If you are looking for something that is reasonably priced, somewhat diversified and will offer you some income in the way of dividends, then by all means have a look deeper to decide for yourself… and with that I’ve got to run, my cordless phone is ringing.
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