Session of 03/27/2007

[David Randolph]

Good morning

Yesterday's winners were VLO, PFSW and DLSL.OB. Here's the first analysis for VLO:

I gave it a 6 out of 10 rating, mainly because, you know, VLO is already a $39 B market cap company. In my view the best case scenario calls for a 10% average annual return in the future.

But it still looks cheap when compared to its industry average, and the short term technical trend is bullish. Good luck to people holding it

I still need to publish the analysis on PFSW and DLSL.OB.

While I walked for my daily coffee, I though that I shouldn't use the absolute value in my revenue table, I should use the rate of change from the previous year, because it is the rate of change that tells me if growth is accelerating or slowing, not the absolute value.

Moreover I'm thinking that for some stocks I shouldn't make such a long term estimate as 10 years down the road, but maybe just 2 or 3 years, because they're high tech companies and fundamentals change a lot. Or I could make estimates with several time frames, reflecting the expected changes in the rate of growth.

Another issue is, for someone following my more in depth analysis, you know I look for at least 16% average annual return to pick attractive stocks. But, by how much are they attractive? And for how long?

It's obvious that the higher the estimated Return on Investment, say, 30 or 40%, the better. But, how much would the stock need to rise for the expected rate of return to drop to the market average of 8%?

If ISP = Initial Share Price, X = Rate of Return, N = # of years and FSP = Final Share Price, the question I'm asking is "how much would ISP need to rise for X to drop to just 8%?"

ISP*(X^N) = FSP

I've learned this stuff, in Portugal we call it "derivatives", I don't know how you call it in the US, but I guess someone like Dnickers knows it better, that man knows about math

I'm thinking of building a model to find fundamental imbalances that will ultimately lead to safe and above average profits. The two questions when analyzing a stock are:

1 - Is there a fundamental imbalance here, that is, with the current public information I see an above average return?

2 - If 1 is "yes", when will that above average return turn into an average return and therefore the investment should be substituted by another stock with a powerful fundamental imbalance?

We'll keep talking, in the meantime, bring up those suggestions for today's poll (they can be the same as yesterday's if you're still interested, even though they didn't get the most votes), thank you

[kslifka]

I'm wondering why small market cap...ELTK is dropping after their earnings report was issued this morning.

Eltek Reports 83% Growth in Net Income for Full Year 2006
Tuesday March 27, 5:15 am ET
-- 2006 net income increased to $2.3 million from net income of $1.2 million in 2005
-- Q4: Company records 10th consecutive quarter of year-over-year revenue growth, 9th straight quarter of profitability and operating income of $877,000, up 31% from Q4-2005
-- Q4 net income of $632,000, up 16% year-over-year

PETACH-TIKVA, Israel--(BUSINESS WIRE)--Eltek Ltd. (NasdaqCM:ELTK), the leading Israeli manufacturer of advanced Flex-Rigid circuitry solutions, today announced its financial results for the fourth quarter and fiscal year ended December 31, 2006.

Highlights for the Quarter:

    * 10th consecutive quarter of year-over-year revenue growth - revenues reached the Company's highest fourth quarter levels ever
    * 9th consecutive quarter of profitability
    * Quarterly net income of $632,000, $0.11 per basic share or $0.09 per fully diluted share

Eltek reported revenues for the three months ended December 31, 2006 of NIS 43.4 million ($10.3 million) compared with NIS 39.6 million ($9.4 million) for the fourth quarter of 2005. The increase in revenues primarily reflects the growth of Eltek's internationally sourced flex - rigid PCBs sales in general, and in the U.S. in particular.

Net income for the fourth quarter totalled NIS 2.7 million ($632,000), or NIS 0.38 per fully diluted share ($0.09) compared with a net income of NIS 2.3 million ($544,000), or NIS 0.34 per fully diluted share ($0.08) for the same quarter in 2005. The fourth quarter of 2006 was the Company's 9th consecutive quarter of profitability.

Highlights for the Year:

    * Significantly improved profitability in 2006
    * 2006 net income increased to $2.3 million from net income of $1.2 million in 2005
    * 2006 operating income increased to $2.9 million from operating income of $1.8 million in 2005

Revenues for the year ended December 31, 2006, were NIS 173.9 million ($41.2 million) compared with revenues of NIS 144.4 million ($34.2 million) in 2005. The increase in revenues primarily reflects the growth of Eltek's internationally sourced flex - rigid PCBs sales in general, and in the U.S. in particular.

Net income for the year ended December 31, 2006 was NIS 9.6 million ($2.3 million), or NIS 1.39 per fully diluted share ($0.33) compared with net income of NIS 5.3 million ($1.2 million) or NIS (0.81) per share ($0.19) in 2005.

Arieh Reichart, President and Chief Executive Officer of Eltek, commented, "2006 was a successful year for us in which we achieved record revenue, consistently delivered y-o-y quarterly growth and increased profitability. I am especially pleased with the improvement in our gross margin and profitability in Q4 06 in light of the continued adverse impact of the ongoing weakness of the U.S. dollar versus the Israeli shekel."

Reichart concluded, "Going forward, we believe that 2007 will be an important year for Eltek. We see various new long-term growth opportunities in our existing markets in the U.S. and Europe, via relationships we fostered and strengthened throughout 2006 and successful deliveries of several strategic pilot runs. With the measures we are taking in the first half of 2007 to grow our production capacity along with strengthening our sales team, we believe that we are well positioned to capitalize on the higher margin opportunities in the high-end PCB market."

Amnon Shemer, CFO of Eltek commented: "We concluded a strong year on the financial front, as 2006 sales reached a new level and we managed to grow our yearly operating and net income by 63% and 83%, respectively, from 2005. During Q4 we improved our gross and operating margins in spite of the negative impact of the continued devaluation of the U.S. dollar against the NIS, and to a lesser extent higher raw material costs."

Shemer concluded, "During 2006 we invested $3.0 million in new capital expenditures, including $1.1 million in the fourth quarter, mainly for manufacturing equipment. In order to meet the growing demand for our high end PCBs, we are now expanding our operation facility by approximately 15,000 square feet, which expansion is expected to bear fruit in the second half of 2007, and selectively adding employees to our manufacturing, supply chain and sales groups to manage expected sales increases in the second-half of 2007."

[buddjas1]

CIMT, here we go?

[kslifka]

CIMT, here we go?

Nice jump.

[Garoh]

as I expected David 

CIMT up

[buddjas1]

http://biz.yahoo.com/prnews/070327/uktu006.html?.v=101

CIMT news.  Sounds nice.  Applaud David for the nice pick.

[soxguy]

David,you were right about Diet. Since earnings,they've gone up every day. Back to $4?

[ygtrdr]

CIMT looks like a winner. Applaud to you David.

[David Randolph]

I'm not going to try to answer the question kslifka, but to put what I think are the right questions to lead to the answer you're looking for.

I see net income in Q4 of $632,000, $0.11 per basic share and $0.09 per fully diluted share. This means the share count is about 5,745,454 (basic) and 7,022,222 (fully diluted). How much was it over the previous years and quarters?

Balance Sheet - 10 Year Summary (in Millions)
Income Statement - quartely

The share count increased a bit, but not much.

So, we have $0.09 EPS per diluted share for the 4th quarter and the stock is trading at $4.24. If we multiple the $0.09 number by 4 we get $0.36 and a forward earnings multiple of 11.78. Doesn't look rich.

With these two tests I didn't get close to the answer ... maybe there's no long term fundamental justification, just profit taking on the good news. Or else not many people paying attention to the stock, it has very low average volume. Or else it is a $24 M market cap with 2006 revenues of just $2.3 M, price to sales ratio is 10.

I would have to study the stock a lot more, will put it on the poll, thanks kslifka

[tokyopua]

CIMT, here we go?

Nice jump.

Haha, just like you said the other day kslifka!  "One day a thinly traded stock just makes a big move when you least expect it" and this was sure not expected by me at least.  Luckily it started sooner than later.

[bourbonstreet_crawdaddy]

Hello David,

Great call on CIMT! Please add WEL to the list of stocks on today's poll. Although the company has increased the share count, it doesn't appear to be holding back the stock, and I would like to hear your outlook on the longer term potential here.

Have a great day

Bourbon   

[David Randolph]

David,you were right about Diet. Since earnings,they've gone up every day. Back to $4?

I've been having bad dreams with DIET soxguy. I've lost on that stock twice. This second time is even harder because the stock is up 30% after the news I expected and waited for months (and this may only be the beginning, if the new food delivery program goes well - the name looks awesome "Deliciously Yours").

I didn't have the necessary patience and confidence to hold through all the storms in the general market. I've learned two very important things from this experience:

1 - If the trade is based on a catalyst, wait for that catalyst to begin, don't buy before the catalyst

2 - Ignore the general market movements, invest in the perspective of the business, using microeconomics, not macroeconomics.

[David Randolph]

CIMT looks like a winner. Applaud to you David.

Thanks guys, no excitement here.

Let me make those analysis on PFSW and DLSL.OB before my kids arrive home.

[Jim897]

Please put EGR back on the list.  It is again up today.

[la-onda]

Hi,
could you please check IEAM (buddjas1 analysis: http://www.3stocksonfire.org/trading/index.php?topic=5889.105)

tia
O.

(CIMT = another awesome call David  )