Wednesday, May 22, 2024

IEHC is Cheap Again

IEH Corp (IEHC) was the second stock I wrote up on my blog way back in 2015.  Coincidentally that post is how I met my mentor so it carries a special place in my heart.  

The stock rose from $6 to $25 over several years of solid results only to fall all the way back due to Covid and missed filings.  The stock only became tradeable again a few months ago so here's your chance with the stock at $6.30.

Of course you can see the story in the chart:

  • In May 2015 I wrote up the stock on my freshly created new blog nonamestocks.  
    • The business story now is much the same as it was.  The company has existed for decades, run by the same family who own just under 50%.  Share count has barely changed in forever.  The company makes high performance electrical connectors, mostly for the aerospace and defense industries.  
    • The stock was profitable and trading at $6 with a $5 book value and TTM EPS of $0.72.  
  • The company performed wonderfully and the stock reached $25 as they earned $2.15 per share in 2019
  • You can see the dive in early 2020 as Covid hit
  • In Oct 2020 the company announced they had "migrated to a new enterprise accounting and inventory system at the end of the second quarter of the fiscal year (September 2019) upon unexpectedly losing support for its legacy inventory system. In connection with the Company’s migration to the new accounting system, including the reconciliation of the old and new systems and preparation of its year end accounting, management discovered that inventory balances previously reported as of September 30, 2019 and December 31, 2019 were misstated"
    • "On October 6, 2020, management of IEH Corporation (the “Company”) concluded, and the Audit Committee of the Board of Directors (the “Audit Committee”) of the Company concurred, that the Company’s previously issued unaudited interim financial statements included in the Company’s Quarterly Reports on Form 10-Q for the fiscal quarters ended (i) September 27, 2019, filed with the Securities and Exchange Commission on November 11, 2019 and (ii) December 31, 2019, filed with the Securities and Exchange Commission on February 14, 2020, should no longer be relied upon."
  • This began a long and rough road which they are only now getting away from.  The company stopped filing reports as they initiated a years long effort to clear up their inventory issues
  • As the SEC rule change took affect Sept 2021, IEHC announced their stock would be moved to the dreaded Expert Market.  
  • Adding insult to injury, the company announced in Aug 2022 the SEC "issued an order (the “Order”) to commence public administrative proceedings (In the Matter of IEH Corporation, File No. 3-20973) to determine for the protection of IEH’s investors whether to suspend (i) for a period not exceeding 12 months, or (ii) revoke, the registration of each class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934."
    • "The Commission is proposing to take such action because it alleges IEH has “repeatedly failed to meet its obligations to file timely periodic reports, and failed to heed a delinquency letter sent to it by the Division of Corporation Finance requesting compliance with its periodic filing obligations…”"
  • The large volume spike you see there in mid-2023 was the company filing its first 10K in years
  • In Dec 2023 IEHC finally was moved off the Expert Market
  • In Feb 2024 the stock was finally tradeable again as the company "completed our re-application to the OTC Market Group, in hopes of resuming trading on their Marketplace in the near future."
  • The stock is now at $6.30 
    • market cap $15m
    • 2.38m shares outstanding
    • $4.9m cash
    • $21.3m book value
    • TTM revenue $19.8m
    • not profitable at the moment but have been in the past
IEHC was a very small position for me and I can't buy expert market stocks so I stopped paying much attention.  I missed when they got back onto OTC Current until about a month ago.  Since then I've been buying because the story is just too good and I see brightness in the future.  

I'm always on the lookout for non-linearities.  It's those abrupt changes in perception or performance where big money can be made.  I see several coinciding right now.  

The two main changes are filings and stock trading status.  We're just coming out of an almost 4 year delinquent filled with Expert Market blockages.  And we're not fully out of the funk yet.  I'm able to buy with Fidelity online as normal.  I have heard the stock is not tradeable on Interactive Brokers.  Schwab does not let me trade online, I have to call it in.  Where there is chaos there is opportunity.

As far as I know, the company is now fully caught up with filings and up to date with everything on otcmarkets.  I just see this warning about quotes, maybe that's why the weirdness with buying right now.  


The latest 10k notes what they found with the inventory system, "inventory balances previously reported as of September 27, 2019, December 31, 2019 and March 31, 2020 were misstated."  I think it took so long to complete just because the company is small.  Reading their filings it sounds like reconciling the new inventory system was a huge pain in the rear.  

The other big change is the backlog which I believe is at, or near, an all-time high even though the stock doesn't seem to notice.  

Company performance has gone down quite a bit since the peak in 2019.  Covid, Boeing's issues, supply chain problems, the aerospace slowdown, and inflation have done a number on IEHC.  

Here you can see the upward trajectory from 2016 to 2020 and then it fell apart.  Backlog fell from 21.6m to just 7.9 and revenue came with it.  


Looking at the plot here you can see the trends follow each other with revenue lagging backlog by about a year.  


What's interesting is new orders since that last 10k are up.  Just last year IEHC started reporting backlog with each quarterly and we can see it's actually grown up to $17m.


Icing on the backlog cake is the press release IEHC put out a few weeks ago annoucing "in the past 8 weeks it has booked over $5 million in new orders".  With that in place the actual backlog should be around that all time high $21.6m from 2020.  Most excitingly the market doesn't seem to notice as the stock is completely flat since the press release and down 20% from when they reported the increased backlog in Q2 six months ago.  Maybe someone will care once the 10k comes out.  

I think investors are asleep at the wheel, having been drugged out due to years of delinquint filing and non-tradeability.  I see a quality company coming out of downturn both operationally and with the stock trading status.  New orders are clearly there.  The stock trading has just been opened up for some, but not all.  

There are risks for sure.  Covid and the overall aerospace/defense down turn over the past few years highlight the customer concentration risk.  

Margins which have really gone sideways.  Over the past 10 years SGA has risen as a percentage of revenue from the mid-teens to 20-30%.  Similarly COGS has gone up from ~65% of revenue to over 80%.  I emailed the CEO and of course he can't give any specifics.  He did say the additional audit, legal, consulting fees over the past few years artificially pushed up SGA and those will be lowering.  Also inflation, gold, and labor costs have hurt margins, but they plan to strategically raise prices in the future to normalize that.  Sounds good directionally and I guess we'll see.  

As usual, I don't have a price target.  I normally don't think that way but rather I imagine potential for years out into the future.  I've held for about 10 years now so what's another 10.  Right now the stock is selling in the low to mid 6's while book value and revenue would put value more like $8.  It was over $20 only a few years ago and I see signs it may get back there.  The recent issues are explainable.  

Operations turning around, stocks coming out of the darkness, and positive press releases the market doesn't notice all get me excited individually.  Here we have all three.  The market has this stock in a downtrend for the past 4.5 years and it now sits at a long term support, that is where I like to buy.



--Dan
disclosure: long IEHC



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21 comments:

  1. Incredible the round trip that this stock has had in the past 10 years. Based on the numbers you've provided it seems evident that whatever the fair value is for IEHC that it's certainly above $6. I intend to pick up a few shares over the coming weeks - thanks for the writeup!

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  2. I have been keeping up with all their filings/press releases for years. I do feel, from the viewpoint of an outsider, that there was a significant amount of incompetence involved and I blame management. No problems should have taken so long to fix.

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  3. I have been also keeping up with all their filings/press releases for years. I made this also huge position in my portfolio. What do you think about their latest motion with sec. New facility - no reaction from the market, new CFO, new value investment oriented guy in BoD, current with sec - no reaction, new ERP, new orders...

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    1. On August 17, 2022, the SEC issued an Order Instituting Administrative Proceedings and Notice of Hearing pursuant to Section 12(j) of the Exchange Act. The stated purpose of the administrative proceeding is for the SEC to determine whether it is necessary and appropriate for the protection of investors to suspend for a period not exceeding twelve months, or revoke the registration of each class of securities registered pursuant to Section 12 of the Exchange Act of the Company. The Company filed an Answer in the proceeding on October 3, 2022 and on October 13, 2022 we conducted a prehearing conference with SEC staff in the Division of Enforcement. On March 1, 2023 the SEC’s Division of Enforcement filed a Motion for Summary Disposition, on March 15, 2023, IEH filed an opposition brief to the SEC Division of Enforcement’s Motion for Summary Disposition, and on March 29, 2023, the SEC’s Division of Enforcement filed a Reply in Support of its Motion for Summary Disposition. On December 22, 2023, the Company filed a Cross-Motion for Summary Disposition. The SEC will issue a decision on the basis of the record in the proceeding.

      https://www.sec.gov/Archives/edgar/data/50292/000121390024013296/f10q1223_iehcorporation.htm

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    2. https://d2jidt2wnq36bs.cloudfront.net/investor_files/2023/3-20973_2023-03-15_IEH%20Corporation_Opposition%20Brief%20to%20Division%20Motion%20for%20Summary%20Disposition.pdf

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    3. oh I thought this was behind them since they are filing and up to date now

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  4. If I take the highest earnings this company has ever made, it was 5.2m in 2019. The market cap is 17.9m. So that would give a P/E of 3.5. This is cheap. However, the 10-year average earnings are 1.25m. This would give a P/E of 14. In this case it is about fairly valued.

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    1. Averaging 10 years of earnings is not how I think about this or any stock. I think in terms of potential and possibilities. It's all about what happens in the future versus what the market thinks will happen right now. With this stock at such a low point on the chart you know the market thinks the future is dim and that I disagree with.

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    2. I see. The thing is, I like statistics. A chart is fine but I think that valuation is more important. Here is another one comparing the stock with its own valuation history: The current P/S ratio is around 0.9. Over the last 10 years the P/S has been between 0.7 and 1.9. The current P/B ratio is 0.8. Over the last 10 years it has been between 0.6 - 2.1. From that perspective, the stock looks quite cheap.

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    3. Yeah statistics are great and for sure numbers matter, but I'm just always thinking about change. A cheap company will stay cheap forever in the absence of change. At least public perception has to change or there's a buyout, etc.

      stock_price = business_value + public_perception. If public perception is low then the stock will never go up

      So what I'm looking at right here is both of those right hand terms are experiencing change for the better, or I believe they will be. New orders and backlog are going up which increases business_value. The stock is becoming tradeable once again after a year's long hiatus which increases the public_perception.

      as for valuation I just looked at 1x revenue and 1x book value and the stock is below that so that's good enough for me once added into the other points like being at a support point on the chart, etc

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    4. Of course if you find a stock that's cheap enough you can say to yourself I don't care about public perception because it's so cheap something has to happen. That's valid

      To me I am just trying to look for all angles. Value investing focuses completely on the business_value term in that equation without considering anything else. Technical analysis focuses solely on public_perception. I try to combine the two.

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    5. Extremely small nuance -- the formula, I think, might be better expressed as:

      stock_price = business_value * public_perception

      If a stock sees a 2-fold increase in revenue ("business_value") and a 4-fold increase in price/sales ("public_perception"), the outcome is an 8-fold move in stock_price.

      Geometric progression.

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  5. Hi Dan,

    Any thought on the lawsuit from former CFO Craig in March? Just doing my DD and he's pretty serious in wanting people to know he was in disagreement with management.

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    1. didn't know there was any lawsuit

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    2. His resignation email: “I enjoyed working here, but I have been cleaning this up for three years, and there is no end in sight. I need to make a change.”

      Plaintiff further stated that he in fact resigned precisely because of his
      disagreement with IEH’s operations, policies, and practices as described above.

      Seems like he's trying to get distance from it - kind of a red flag but maybe just a personal issue with Offerman - hard to tell.

      Links:

      https://www.courtlistener.com/docket/68356300/craig-v-ieh-corporation/

      https://storage.courtlistener.com/recap/gov.uscourts.nyed.512167/gov.uscourts.nyed.512167.1.0.pdf

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    3. thanks. it says he is seeking at least $75k

      Seems the whole thing is in response to IEHC's 8k they filed saying the old CFO has no disagreement with the company when in face he didn't like working there and told them to take out that language in the filing. Doesn't sound great the company filed that 8k with that language. they should've just not put in that sentence. Maybe IEHC once they put it out they just feel they can't or don't want to change or retract the statement.

      overall it's not what I'd like to hear. Seems like an argument between two people who don't like each other and are fed up. I guess it will mean the company spends some money on lawyers and potentially paying this guy off.

      doesn't change my thesis which is basically as the company files more and becomes more easily tradeable, and as revenue/earnings grow due to the increased orders, the stock will move up

      this type of thing is also why I don't hold a concentrated portfolio. I own like 60 stocks or something to protect myself from one going wrong

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  6. I wonder if their connectors would be useful in a data center environment?

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    1. I emailed company with the data center question. I was surprised to receive a swift response. They felt that their product would be overkill for a data center environment and they do not currently sell into data centers.

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  7. 10-K is out and it looks like positive progress continued as expected to March 31. Revenue way up, gross margins growing again, back-orders up, almost profitable again.

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    1. nice. Q4 technically booked a profit thanks to the income tax benefit and operating income pretty close to profitable. Q4 rev is $6.9m which is the highest in years. Backlog highest since 2020 and that was by end of Mar which is before their last announcement about new orders.

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