Littelfuse Q3 – impressive results considering headwinds

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Volha Levitskaya

Littlefuse (NASDAQ:LFUS) remains one of our favorite companies, one that doesn’t have much of a following despite generating impressive returns for shareholders.

The company once again delivered solid results that exceeded expectations. For the third quarter, Littelfuse achieved 22% revenue growth and organic growth of 8%, despite the difficulties of the exchange rate and the weakening of the economy. Despite its resilience and continued growth, the share price has fallen in sympathy with the market and is down about a third from its peak reached in late 2021.

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The company reported that overall demand remains strong, but is weaker for consumer-facing end markets such as home appliances. Littelfuse has been able to offset some of the weakness in demand with new designs, especially with applications geared towards sustainability and battery power. Some examples of design achievements during the quarter include applications in power tools and electric bicycles.

Third Quarter 2022 Results

Revenue was $659 million, up 22% from last year and up 8% organically. The acquisitions of Carling and C&K Switches added 18% and the exchange rate reduced revenue by 4%. GAAP operating margins were 18.5%, while adjusted operating margins were 21%. Third quarter GAAP diluted earnings per share were $3.02, and adjusted diluted EPS was $4.28, up 8% from last year.

A quality business

As a reminder of why we love Littelfuse so much, this is a business that is not only growing revenues and profits in the double digits, but also growing profitably. The ten-year average return on capital employed is ~13%. This is particularly important given that Littelfuse retains most of its profits.

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This is a well-run business that has nearly quadrupled its earnings per share over the past decade, despite operating in cyclical industries.

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Innovation

Importantly, Littelfuse continues to innovate and launch new products and technologies, many of which enable sustainability. Some examples are shown below, including a circuit protection component for photovoltaic applications, an electric vehicle fuse, and an optically isolated MOSFET gate driver.

Littelfuse New Products

Littelfuse Investor Presentation

Balance sheet

Littelfuse ended the quarter with $474 million in cash and short-term investments. Net debt-to-EBITDA leverage remains at the lower end of its target range, which should allow the company to pursue further acquisitions should the weakening economy bring attractive M&A opportunities.

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For the fourth quarter, the company expects sales in the range of $603 million to $623 million, up 11% from last year and down 4% organically. This assumes around 15% growth from acquisitions and a 4% headwind from currencies. Littelfuse projects fourth quarter adjusted earnings per share to be in the range of $3.14 to $3.34.

Fourth quarter guidance implies full-year sales of ~$2.5 billion and adjusted earnings per share of ~$16.77, both company records. This would represent sales growth of 21% over the prior year and adjusted earnings growth of 27%.

Valuation

Currently, the market is giving very little credit to Littelfuse’s excellent results. The stock trades near the bottom of its EV/EBITDA range for the past ten years. We believe that ~10x for such a high quality company is an attractive price and therefore we view the stock as somewhat undervalued.

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Twelve-month P/E ratio is almost half the ten-year average, and forward P/E is even lower at ~12.7x.

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risks

We think the biggest risk with Littelfuse is that it operates in very cyclical industries, and investors seem very concerned that profits and revenues are about to come crashing down. This is probably why the valuation has dropped so low, even though the company has done very well so far. While it is very possible that we are about to enter a severe recession, there is also the possibility of a soft landing or a very mild recession. In any case, we believe the company is strong enough and has the balance sheet to survive a deep recession. This strength is reflected in the very high Altman Z-score of 4.3x, which is comfortably above the 3.0 threshold for strong companies.

Littlefuse Risks

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conclusion

Littelfuse shares have lost about a third of their value since peaking in late 2021, despite the company continuing to deliver strong growth and positive results, now including the most recent third quarter. We continue to view the company as a very high quality business, despite the cyclical nature of the industries in which it operates. As a result, we view current prices as an opportunity to buy shares at a low valuation. There are risks to consider, including the possibility of a recession just around the corner, but we are reassured by the strength of the business, new design wins and a strong balance sheet.

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