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Why Should You Stay Away From Sevcon? Mario Gabelli Reduces
Posted by: Damian Illia (IP Logged)
Date: November 28, 2013 10:06PM
According to GuruFocus Real Time Picks, Mario Gabelli just made a reduction to Sevcon, Inc. (SEV). So, one question arises: What does Gabelli see to reduce that position?
Sevcon through its subsidiaries designs and sells motor controllers for zero emission and hybrid electric vehicles under the Sevcon name in the U.S., England, France, South Korea, and Japan. Sales in the U.S. accounted for almost 44% of the total in fiscal 2012.
Almost a Monopsony
Half of 2012 sales were from ten customers, and worst of all, the largest one accounted for 10% of total sales. Imagine the impact in the company's performance, the loss of one or more of these key customers. Additionally, the firm has global competitors which are divisions of larger public companies, such as Danaher (DHR), Hitachi (HTHIY) and General Electric (GE).
Two (Main) Suppliers
Although the company is making an effort to reduce its exposure to a few suppliers, for certain components the firm depends on the supply of Fideltronik in Poland and Keytronic in the U.S. We see this like a major risk that could probably derives in a supply problem.
Going forward, we are going to see useful measures in investment analysis. Unfortunately, all of them (probably) show poor management decisions.
1) Revenues for the nine months ended in June were down 15% year over year.
2) Net income has decreased by 20.5% when compared to the same quarter one year prior.
3) Net operating cash flow has decreased by 41.03% when compared to the same quarter last year.
4) Cash generation is significantly lower than it peers.
5) Price-to-book ratio is lower than 71% of the semiconductors industry median.
6) Earnings per share declined by 20% in the most recent quarter compared to the same quarter a year ago.
7) Stock price appreciation is null for the last ten years.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to the same quarter one year ago. I have to emphasize this because is a signal of major weakness within the company.
Although growth in semiconductors in the long term is highly correlated to GDP and we expect an improvement in the U.S. and China´s economies, we think that Sevcon might not be the best option in an industry with approximately 5,000 companies.
In the third quarter the company appears to be in a bear trend, sales and net income have dropped, and we expect this trend continues in the future.
Since 2011, Hedge fund guru Mario Gabelli has reduced the stock in four occasions and I would recommend staying away from Sevcon at the time.
Disclosure: Damian Illia holds no position in any stocks mentioned
Stocks Discussed: SEV, DHR, HTHIY, GE,
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