VISHAY PRECISION GROUP INC VPG
August 14, 2016 - 12:13am EST by
MSLM28
2016 2017
Price: 14.00 EPS 0 0
Shares Out. (in M): 13 P/E 0 0
Market Cap (in $M): 185 P/FCF 0 0
Net Debt (in $M): -15 EBIT 0 0
TEV ($): 170 TEV/EBIT 0 0

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  • Take Private
  • Operating Leverage

Description

Vishay Precision Group (“Vishay”, “VPG”, or the “Company”) is a niche manufacturer of highly
specialized electronic sensors. VPG currently operates three business segments: (1) foil
technology products which consists of strain gauges and foil resistors, (2) force sensors which
manufactures a broad line of load cells and force transducers, and (3) weighing and control
systems which provide customized weighing and control mechanisms.
 
We believe Vishay is a timely investment due to a recent announcement that the Company
has hired Evercore to sell the Company. Currently trading for ~6.6x EBITDA, Vishay trades
at a significant discount to multiple private market transactions which have been
consummated in excess of 10x EBITDA. Vishay is a classic example of an attractive niche
business woefully undermanaged. Despite poor management, our customer checks revealed
that VPGs products are highly regarded with little to no alternatives in the foil space, making
them an attractive target for numerous industrial conglomerates. Furthermore, VPG is one of
the largest niche sensor assets on the market currently for sale. If a transaction is executed
on the lower end of private comps, VPG shareholders would receive ~$20 per share or ~40%
upside.
 
This opportunity exists as the founding family has a long history of milking Vishay and under-
delivering on its strategy, which when combined with an inefficient cost structure has led to
EBITDA margins roughly half that of peers. This scenario has now changed as Management
will likely be held accountable by new board members, an activist investor along and
additional like-minded shareholders.
 
Even without a sale outcome, we find the set-up attractive as the market is over-looking
Vishay’s business fundamentals consisting of (1) leading market position; (2) numerous
capital allocation opportunities; (3) strong cash generation through the cycle supplemented
with a rock solid balance sheet; (4) exposure to multiple healthy end markets such as
healthcare; and (5) recent corporate changes which should lead to significant belt tightening
and cost cuts.
 
Dominate Market Position & Attractive Niche
 
o Vishay is the largest foil products/resistor manufacturer, with over 50% market
share of certain niche sensor verticals.
o The Company’s size provides the requisite scale to carry a wide category of
products on favorable terms (working capital and price) with vendors.
o VPG’s dominate market position has allowed for the Company to generate ~40%
or higher gross margins in its foil business while generating returns on invested
capital in excess of 20%.
o Given VPG’s products’ average selling prices are a low percentage of the end
product’s total cost, competition tends to be determined on quality and
performance with price being the laggard. Due to VPG’s technical know-how and
scale within their respective niche, Vishay has a clear advantage.
o VPG is #1 in foil technology, a high margin cash generative business & leader in
the fragmented weighing and control systems market.
 
Diversified Customer Base & End Markets
 
o Vishay boasts a diversified customer base with no customers totaling more than
5% of revenues as well as no meaningful top ten customer concentration.
o Customer base includes companies operating in a variety of industries ranging
from medical equipment, semiconductor, precision measuring, aerospace,
industrials and consumer equipment among others. This helps smooth negative
revenue impacts if one end market is weak (i.e. steel in FY14/FY15).
 
o The Company’s customer base is diversified across multiple channels consisting of
OEMs, EMS, distributors and end users.
o VPG’s products are sold into a variety of end markets, inclusive of those with
positive long-term outlook such as aerospace and healthcare.
o Vishay’s fragmented customer and distribution base across the world allows for the
Company to maintain pricing as well as partially insulate its business from a
degradation in one region or industry.
 
Durable Cash Generative Business Model with a Strong Financial Position
 
o Vishay consistently generates free cash flow through multiple business cycles, with
only one negative year of free cash flow over the past 8 years, which was
predominantly driven by growth CapEx.
o The Company’s financial profile for Foil Technology and Weighing & Control
Systems is strong, with gross margins at ~40% and 25% or greater EBITDA
margins while requiring very little CapEx.
o EBITDA-CapEx conversion is strong historically in excess of ~75% and consistently
above 80% in prior years.
o Maintenance CapEx is low at ~$6MM per annum roughly 3% to 4% of revenues.
o The Company boasts a strong balance sheet with ~$15MM of net cash.
o Solidifying VPG’s business model, in FY09 during the downturn Vishay experienced
a ~30% trough in revenues, yet free cash flow remained strong at $20MM.
 
Inexpensive Valuation below Private Market Transactions
 
o Vishay currently trades for a 6.6x FY15E EBITDA, an undemanding multiple for a
niche sensor and systems market leader, which has demonstrated consistent cash
generation and near a ~10% EV to FCF yield.
o Vishay’s industry has been active as of recent for acquisitions, with peers
purchased from 12.0x to 20.0x EBITDA. Due to VPG’s size and business
characteristics, a 10x 12x EBITDA multiple would not be surprising given the
synergies a large acquirer could remove and would represent ~60% upside
assuming 10x multiple.
o One recent example includes Measurement Specialties, which was purchased in
2014 by TE Connectivity for ~20.0x EBITDA.
o VPG currently trades at a discount to tangible book value, a rough approximate of
liquidation value. Hence with only minimal downside, VPG offers an asymmetric
opportunity.
o Golden Gate Capital is a 4.8% shareholder and currently owns an industrial sensor
business, Humanetics/Hitec which is a possible acquirer. Furthermore, competitors
such as Spectris plc, Sensata and Curtiss-Wright are likely highly interested in
VPG’s assets noting Vishay’s strong market share has kept many participants out
of the market. Finally, VPG is one of the largest sensor assets in the market.
o In August 2016, it was announced that VPG hired Evercore to run a sale process.
 
Capital Allocation Opportunities
 
o Management has begun to execute on their share repurchase plan, repurchasing a
little over ~$5MM of shares or 3% of shares outstanding since the beginning of
FY15. Near tangible book value, this represents significant value. Furthermore,
this only represents 1/4th of its ~2MM share repurchase program.
o Additional opportunities remain for small bolt-on acquisitions (likely too pricey in
this environment) or a leveraged recapitalization. In order for the Company to
 
achieve its ~$300MM revenue/20% or greater EBITDA margin goals, a niche
acquisition is likely.
o Management has looked at select acquisition targets with high gross margins (45%
or greater) for which they believe they can easily handle ~3.0x leverage. While
Foil Technology Products could easily handle 3.0x leverage or more, the
Management team has not handled significant leverage at VPG.
 
Operating Leverage Imminent & Cash Flow Inflection Point
 
o VPG’s operating model carries tremendous operating leverage, with incremental
EBITDA margins of ~50% for additional revenue over $250MM.
o Moreover Vishay has been aggressively spending on various business
improvements, such as the build-out of its advanced sensor platform in the foil
unit, as well as operating initiatives in its two remaining segments. This has also
spread to the CapEx line, with normalized CapEx estimated at ~$6MM to $8MM per
annum versus the $10MM spent for FY15.
o Management’s plan is for once $300MM of revenues is achieved, EBITDA margins
should be roughly ~20% or $60MM in EBITDA. Currently the Company generates
~$24MM of EBITDA on $232MM of revenues, signaling significant leverage.
o Vishay likely reach it’s ~$300MM goal through a combination of organic growth
from its foils and WCS segments and potentially a tuck-in acquisition.
o Management expects FTP can grow gross margins from 40% to the low to mid 40%
range, force sensors to sustainably operate in the high 20% range, and depending
on the cycle, WCS from its trough 45% gross margins to 50%. With ~$28MM of
fixed corporate costs, operating leverage is significant.
o Corporate overhead is egregious at Vishay and offers a significant cost cutting
opportunity. Corporate overhead runs between ~$25MM to$26MMand does not
include R&D, segment S&M and segment accounting costs (i.e. division controllers)
which run through the three segment P&Ls. Per our estimates, VPG could easily
eliminate ~$10MM of corporate costs while a strategic or sponsor could remove
$15MM to $20MM of corporate costs. Additionally we believe VPG could shrink its
manufacturing footprint.
 
 
Why Does This Opportunity Exist?
 
 
FX & End Market Headwinds
 
o VPG has experienced significant headwinds in certain end markets, particularly
steel mills, which has impacted its WCS division.
 
Lack of Sell-Side Coverage & Size
 
o As evidenced by the Company’s conference calls, VPG has no analyst coverage
beyond an occasional note by Sidoti and B.Riley.
o Vishay’s sub $200MM market capitalization limits the size of potential investors.
 
Controlled Entity
 
o Vishay is controlled by the Zandman/Shosani family through B-class super voting
shares as well as class A equity.
 
Value Trap?
 
 
o Since its spin-off in 2010, Vishay has remained cheap to a certain extent, defined
as not trading above 2x TBV or ~10x EBITDA.
o Due to recent industry consolidation and ability to scale, this scenario likely has
changed. Furthermore, business quality relative to actual value is the most
important determinant.
o Business quality is solid as defined by strong returns on capital and recent capital
allocation decisions have increased intrinsic business value
 
Investor Fatigue
 
o Long time investors from the spin-off such as Century Management, Gates Capital
have exited due to a lack of acquisitions (one of the Company’s key strategy points
from the spin-off) and lack of large-scale share repurchase programs.
 
Valuation
 
Over the past two years, there have been multiple precedent transactions in VPG’s universe
as well as adjacent spaces. Multiples as of recent have ranged from ~10x to 20.0x EBITDA.
Assuming reasonable multiple to VPG derives the following return profile and a significant
margin of safety:
 
 
 
Moreover, our private market and upside valuation are supported by a sum-of-the-parts
scenario, which values the Company’s attractive FTP segment at a multiple in-line with private
market transactions and a multiple significantly below comps applied to the Company’s WCS
and Force Sensors businesses.
 
 
 
 
 
 
Catalysts
 
Take-Private
o Vishay currently trades at ~5.5x EBITDA. Currently acquisitions have taken
place over the past year at ~12.0x to 20.0x EBITDA, with Measurement
Specialties recently purchased for 20.0x.
 
o Assuming VPG sells for ~8x 12x EBITDA, current investors would gain over
50% upside.
 
o Financial Sponsor Golden Gate Capital is a 4.8% shareholder and owns
competitor Humanetics. Moreover, Golden Gate has been aggressive in rolling
up the industry.
 
Operating Leverage & Cost Cutting Opportunities
o Vishay’s segments carry strong incremental EBITDA margins, estimated at
~50% for incremental revenue over $250MM.
o Assuming Vishay reaches its internal goals of $300MM of revenues, implied
EBITDA would range from ~$50MM to $60MM before corporate cost cuts.
o Despite Management announcing over $6MM of costs to be removed from the
business in FY16, we believe there are significant opportunities for additional
cost cuts as well as working capital optimization. This will likely be on the
agenda of the Company’s new board member, Cary Wood.
o For instance, VPG has ~$25MM of corporate overhead which is excessive for a
$180MM market capitalization and considering all R&D, sales and segment
accounting costs run through segment P&Ls. Per our estimates, at minimum
$10MM - $15MM can be cut from corporate overhead. This is a slam dunk line
item for a sponsor or strategic.
 
Capital Allocation
o Continued share repurchases under 6.0x EBITDA and near TBV are highly
accretive to intrinsic value and precedent transactions.
 
o The Company is under-levered with no net debt. Assuming ~2x debt to EBITDA,
VPG could repurchase over 30% of its shares outstanding.
 
o Smart bolt-in acquisitions in niches similar to foil technologies under 6.0x pre-
synergy EBITDA would potentially be highly accretive for the Company due to
scale and incremental margins. The Pacific Instruments acquisition likely fits
this bucket.
 
 
 
 
 
Risks
 
Reliance on Industry CapEx Cycle & Overall Cyclicality
o Cheap valuation prices in a downturn.
o Ability to rationalize cost base as $10M - $15MM of corporate overhead alone
could be cut, creating significant cash flow regardless of market conditions.
o VPGs financial profile is linked to multiple end markets. Moreover in FY09
EBITDA materially declined yet FCF generation was strong at over $20MM.
 
Management Continues M&A Strategy
o Recent transactions such as the Kelk acquisition (for ~6.3x headline EBITDA),
have not been a success thus far given the weakness inthe target end markets.
 
o Cash will generally be better utilized for process improvement in foil technology
as well as share repurchases.
 
o Activists and the hiring of Evercore likely reduce this risk for the near-term.
 
 
Family Control & Perennially Cheap
o Mitigated by recent corporate action such as the hiring of Evercore and
activist intervention.
o Management has repurchased shares over the past year.
o The Company’s EBITDA trading multiple has ranged from ~4.5x to ~9.0x over
the past 4 years as well as a 20% -50% premium to tangible book. Assuming
a normalized multiple or improvement in the business, VPG equity should re-
rate to ~8x or higher.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Sales process

Further Cost Cuts

Management Change

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