Strattec Security Stock: A Key Perspective for Your Portfolio (NASDAQ: STRT)
Sometimes the smallest and simplest technologies turned out to be among the most important. Take the example of the lock and key. Since the invention of this duo, people have been able to secure their assets in a way that has never been possible before. before. Plus, there’s also the fact that as long as the world’s population is expected to increase, the need for locks and keys will only increase. Given this fact, it stands to reason that an attractive avenue for investors to consider is ownership of a business like Strattec Security (NASDAQ:STRT). The fundamental performance achieved by the company has unfortunately been a bit volatile in recent years, showing no real trend in terms of turnover or profitability. But given the low stock price at the moment and the company’s low leverage on its books, it looks like an attractive opportunity for long-term value investors to consider.
A key to profit
As I mentioned before, Strattec focuses on the design, development and production of locks and keys for its customers. Although I guess that description is too simplistic. Specifically, the company manufactures access control products including mechanical locks and keys, but also electronically enhanced locks and keys, passive entry passive start systems, ignition lock boxes for steering column and dashboard, locks, power sliding side door systems, power tailgate systems. , and a variety of other offers. It does all of this in the context of the automotive space, with a focus on the North American market. Through its partnerships with WITTE Automotive and ADAC Plastics, the company also provides its offerings to global car manufacturers. This arrangement essentially creates a global cross-selling network between the three parties, as shown in the image below.
At first glance, the concept of focusing on locks and keys may seem simple. It certainly sounds like low tech. But as you might have guessed based on my previous description, the company gets involved in some rather complicated technologies, such as those that are sensor-centric. A good example here would be the key fob, which lets you lock or unlock your vehicle wirelessly. The company also produces electronic rotary ignition modules that are used in conjunction with key fobs. Many of the company’s other offerings came through its 2009 acquisition of Delphi Corporation’s Power Products Group. This purchase introduced the company to the production and sale of access devices for sliding side doors, tailgates, tail lifts and truck covers. Much of the company’s revenue comes from selling its offerings to major automakers. For example, in its 2022 fiscal year, the company generated 28.8% of its revenue from General Motors (GM). Its second largest exposure was to Stellantis (formerly Fiat Chrysler Automobiles), accounting for 18.4% of sales. Ford Motor Company (F) comes in 3rd position with 17.6% of turnover. The list goes on from there, with customers such as Hyundai/Kia and many more.
Strattec’s financial situation has been a bit lumpy over the years. After seeing its revenue rise from $439.2 million in 2018 to $487 million in 2019, it fell to $385.3 million in 2020, due to weakness resulting from the COVID-19 pandemic. Sales rebounded to $485.3 million in 2021. But in 2022, sales suffered again, falling to $452.3 million. It should be noted, however, that this weakness in sales was not attributed to weak demand, but rather to the global shortage of semiconductor chips. But that didn’t stop some of his clients from generating more revenue for him than the previous year. Most notable was Ford, which accounted for $79.7 million of the company’s revenue in 2022, up from $67.7 million reported a year earlier. This is largely due to higher product content, particularly associated with a new power tailgate business for F-150 pickup trucks.
Ultimately, it’s been even more volatile for the company in recent years. As you can see in the chart above, the company went from net profit in 2018 to net losses in 2019 and 2020. 2021 saw net profit of $22.5 million, a figure that is fallen to $7 million in 2022. As a very small company that relies heavily on a few large customers, the pressure on it to keep costs low is likely significant. The reduction in the company’s gross profit margin from 16.2% to 12.4% was particularly painful in 2022 compared to 2021. This, in turn, was largely due to the increase in salaries and benefits paid to employees in Mexico, unfavorable foreign currency fluctuations and lump sum bonuses paid to its Milwaukee-represented hourly workers upon ratification of a new four-year employment contract. Selling, general and administrative expenses also increased from 9.2% of sales to 10.4%, primarily due to prior year customer reimbursement of technical development costs no longer helping the company, and other similar factors.
If you are looking for some degree of stability from a profitability standpoint, this is definitely not the company for you. Even when it comes to cash flow, the situation is a bit volatile. Over the past five years, operating cash flow has rebounded everywhere, going from a low point of $6.9 million to a high point of $35.4 million. Taking into account the evolution of working capital, the volatility is still quite high, with a low point of $14.8 million and a high point of $52.7 million. Last year, the figure was $26.8 million. The same can be said for EBITDA, with a value between $10.6 million and $53.2 million over the past five years. Last year it was $27.8 million.
Unfortunately, no one knows what the future holds and management has provided no real direction for the future. What we do know is that in the long term, the demand for semiconductors is only expected to increase. However, the pandemic has resulted in significant supply chain issues and, in turn, helped cause the shortage we are experiencing today. Add to that the fact that demand is likely to continue to increase, and we could face challenges for companies like Strattec. For example, a report provided by KPMG indicates that supply chains continue to struggle to meet demand, with semiconductor sales expected to reach $600 billion this year from $556 billion last year, driving a Ongoing chip shortage expected to last through 2023, with 56% of semiconductor companies currently expecting the shortage to continue during this time. And with the automotive industry being the second largest driver of semiconductor growth, second only to the wireless communications industry, that doesn’t bode well for a company like Strattec who will ultimately have to deal with the shortage by paying higher prices and facing lower production volume.
It is therefore difficult to really evaluate the company. But if we rely on 2022 data, the company is trading at very cheap levels, with a price/adjusted operating cash flow multiple of 3.2 and an EV/EBITDA multiple of 4.3. These numbers compare favorably to the 1.6 and 2.2, respectively, that we get using 2021 data. Even if financial performance returns to where it was in 2020, however, shares of the company would be considered quite affordable, with multiples of 5.8 and 11.3, respectively. I also compared the company to a few different companies. But given its small size and market, there weren’t many good companies to choose from that had positive trading multiples. The only one that had positive trading multiples was International Superior Industries (SUP), which trades at a price/operating cash flow multiple of 1.2 and an EV/EBITDA multiple of 3.4.
Basically, Strattec is a rather volatile company. However, the company compensates for this and the fact that the shares are cheap on an absolute basis. This image could change depending on market conditions. If the shortage of semiconductor chips continues as expected, finances could be affected to some extent. At the same time, however, even a return to the profitability levels seen in 2020 would not render the company overvalued. Additionally, there’s also the fact that the company has only $2.23 million in net debt at the time of this writing, making it a very low-leverage game with little risk of leverage. insolvency. Considering all of these factors, I’ve decided to rate the company as a moderate “buy” at this time.