Sector financial performance:

This company, who is primarily a manufacturer of engineered components including spring, wire form, rod, and fabric for use in bedding, home and work furnishing, and automobile, has been grouped into engineered components –spring& wire form& fabric sector in furnishing industry.

While demand for spring, wire form, and steel rod has been strong as indicated by sensitive economy elasticity of sale volume to price, the sales of companies really depended on price before 2018. Companies, benefited from decreased price and promotion, have gained growth in sales volume from automobile and aircraft customers, but experienced decrease in sale volume in bedding and furniture segments due to low price impact of foreign manufacturers in the most of time in the past several years.

However, it seems that the demand has been growing fast in the second quarter as indicated by large increase in sale volume of this company (8% annual growth in sales volume from typical company) all across its segments, which present a fundamental change in this industry (driven by true increase in demand and less competition of foreign manufacturers).

Before 2018, while facing huge pressure on price due to competition, companies still managed to improve their margin slightly since 2014 thanks to decreased raw materials. However, margin went down in 2018 as a result of increasing raw materials price, which seems not to be able to be passed to final product’ price by those companies.  Typical gross margin is about 21% in 2018. The average SG&A as percentage of sales is about 10% and the operating margin is about 10% in 2018.

The typical stock Price/cash flow ratio: 26 (interest/EBI ratio of 18%).

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Company performance:

It seems that the demand for products of this company was very strong after entering 2018 as indicated by increase in sale volume for all of its segments including continuously strong demand from automobile and bedding customers in the past several years and catching up demand from other segments.  It seems that the increased demand from automobile segment before 2017 has been supported by lower price/promotions.

The first six months of fiscal 2018 compared with the 2017

Same location sales (excluding divestiture and acquisition) increased by about 8% (10% second quarter) attributable to 4% (6% second quarter) increases in volume and 4% increase in price (due to increased price of raw materials)

 The fiscal 2017 compared with the 2016

Organic sales (excluding divestiture and acquisition) increased by about 6% attributable to 4% increases in volume and 2% increase in price ( due to increased price of raw materials)

Fiscal 2016 compared with 2015

Organic sales (excluding divestiture and acquisition) decreased by about 1% attributable to 3% decreases in price/currency impacts offset by increase of 2% in volume.

Fiscal 2015 compared with 2014

Organic sales (excluding divestiture and acquisition) increased by about 1% attributable to 6% increases in volume and decrease of 5% in price/impact of currency.

Its gross margin has gone down below 21% in 2018 primarily due to increased costs of raw materials (increased cost has not been passed completely to price). Due to the decrease of 170 basis points in SG&A as percentage of sales, its operating margin has thus gone up from about 8% to 10% in 2017.

Stock price

This stock currently has an enterprise price/EBI ratio of 26 ($45). We think that its stock is being relatively overvalued considering that increase in sales resulted from less intense in competition cannot offset decrease in margin due to increasing costs.