LEM (Electronic-Mechanical Connections) is a Fribourg company specializing in components for measuring electrical parameters.
Founded in 1972 and listed on the Swiss stock exchange since 1986, the group is a leader in electricity and voltage measurement.
The market capitalization reaches 1.3 billion francs and the company employs more than 1,500 people, with production sites in Geneva, Beijing, Sofia, Tokyo and Beijing.
The key products, namely current and voltage transformers, are used in a wide range of applications in the industrial, traction, energy and automotive markets. Its products are used in general industry as well as in the automotive industry and railway systems and lines engineering.
China is LEM's main market for several years (approximately 30% of its sales are concentrated there).
There Automotive division (around 20% of turnover) offers in particular components for the engines and batteries of electric, hybrid and semi-hybrid cars.
There Industry division (approximately 80% of turnover) is mainly active in renewable energies, particularly in the solar field.
From 2012 to 2018 (at LEM, the financial year runs from April to March), turnover increased by 27.5% and net profit by 87%!
With a net profit margin (NPM) of 17.7% and a return on equity (ROE) of 48.9% (!!!), the Fribourg group is a real money printing press.
The finances are very solid, with 59% of equity and liquidity of more than 12 million francs.
Earnings per share are expected to be around CHF 50 for 2018/2019 (at LEM, the financial year runs from April to March). At a rate of 1152 francs, this results in a 2018/2019 PER of 23.
This value may seem high, but it is very reasonable in historical comparison and especially given the quality of the company. LEM is indeed one of those extraordinary companies of the same ilk as Geberit, EMS Chemie or IVF Hartmann and which are always expensive (rightly so).
The payout ratio is traditionally very high at LEM (85% this year), which means that depending on the industrial cycles the dividend is sometimes lowered, as was the case for example in 2016. Nevertheless, the dividend increased from 25 to 40 fr from 2012 to 2018, a (salary) increase of 60%. The dividend yield is currently 3.5%, a very attractive value.
The stock is very volatile, which is explained in particular by the sector of activity and the free float of only 34%. Thus, the stock more or less doubled in 2017 before losing almost 40% this year! This roller coaster is the normal behavior of this stock in the short term, which is why It is reserved for experienced investors with strong nerves. On the other hand, in the long term the trend is clearly bullish, with a performance of more than 1000% in 30 years.
LEM invests heavily in research and development (around 8% of its turnover), which allows it to remain at the cutting edge of technology and constantly offer innovative products.
In my opinion, the main risk for LEM is its dependence on the Chinese market.
Conclusion
LEM is a real gem that will continue to benefit from major trends in our society such as automation, renewable energies and electromobility (notably the boom in green cars in Asia).
The current price is an excellent opportunity for a long-term investment.
This company, we LEM or we don't LEM.
I have chosen my side.
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Ah ah ah dividinde, you can't help it 😉
So here we are in the middle of a Warren-style title and it doesn't surprise me that you LEM 🙂
A good real franchise, with big margins, strong profitability, controlled overheads, no debt and modest capital expenditure requirements.
This is a very solid title, which is not likely to go bankrupt tomorrow (Altman Z-score of 14.3!), with, as you also pointed out, strong liquidity reserves.
That being said, you can imagine that the little Benjamin in me LEMs a little less.
I find the title a little expensive, according to all my usual criteria, and in particular compared to sales (4.28). When this ratio exceeds 3, it is very often a sell signal precisely…
Let's add to that that we have been in a clearly downward trend for 6 months, which is not good either.
From a dividend perspective, as you said, the payout ratio is out of bounds relative to earnings. But it's even worse relative to FCF (nearly 120%).
In summary, it's true that it's heavy, but a little expensive all the same. You'll tell me that quality has a price, that's fair.
Maybe I'll LEMer a bit more when the price has stabilized at more reasonable prices.
Holy shit I realize that I have been really picky for several months. Not only am I not buying anymore, but I am selling more and more which means that I find myself with a lot of cash. The S&P 500 has just broken a new record, the PE Schiller Ratio on this index and the Buffet Index are at astronomical levels. All this does not inspire me with anything good as we approach autumn…
And no, I can't help it, I can't help but make rotten puns! 🙂
LEM is indeed a real franchise and for me the current valuation is an opportunity to seize. On the other hand I understand your reluctance, it is difficult when you are a pro-Graham to force yourself and buy at this price.
I have already won 20 or 50% several times with this marvel... and each time regretted having sold too early and missing out on winnings of several hundred %.
This time it's certain: As long as the fundamentals remain this strong, LEM is a stock I want to hold until my last breath! 😉
Thanks to your article the stock went up 6%!
It is usually the banks that make recommendations to increase their stocks!
It's not very pretty all that dividinde 😉
LOL, I warned in my article: it is a very volatile stock and it could very well lose 6% tomorrow. What really matters is the long term trend and I don't see any reason for it to become less phallic. 🙂
@Jerôme: do you find Altman's Z-score on a free site or is it paid data? And do you also find Piotroski's F-score there?
You are never better served than by yourself!
I calculate it all by myself. Like a big boy :)