SMTC Corporation: Micro-Cap Tech Manufacturing Stock Now on Sale

SMTC Corporation: Micro-Cap Tech Stock on Deep DiscountSMTC Stock Could Benefit if Electronic Manufacturing Moves Back

The constant talk about shifting supply chains away from China and back home has yet to result in a major exodus, but there is movement. One area being talked about is the third-party contract manufacturing—or electronic manufacturing services (EMS)—segment, a move that would benefit players like micro-cap SMTC Corporation (NASDAQ:SMTX).

SMTC was one of the numerous EMS providers that emerged in the late 1990s and early 2000 in response to the growing demand for third-party electronics manufacturing. SMTX stock once traded at above $100.00 in 2001 before the broad decline in the technology sector.

I doubt SMTC stock will trade anywhere near its record high anytime soon, but hovering below $4.00, SMTC represents an intriguing risk/reward EMS play that could return above-average long-term gains.

On the chart, SMTX stock broke down from the sideways channel around $3.00 in early September 2019. The stock plummeted to $1.32 during the March sell-off, but it has since staged an impressive rally.

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Chart courtesy of StockCharts.com

SMTC stock has drifted sideways since trading at over $10.00 in 2002. My hope is that the company’s improving fundamentals will be enough to resuscitate SMTC out of its comatose state.

Improving Fundamental Picture Bodes Well for SMTCX Stock

A glance at SMTC Corporation’s five-year revenue picture shows the decline from 2015 to 2017, followed by the pickup in 2018 and impressive growth to a five-year high of in 2019.

Fiscal Year Revenues (Millions) Growth
2015 $220.6
2016 $167.9 -23.9%
2017 $139.2 -17.1%
2018 $216.1 55,2%
2019 $372.5 72.4%

(Source: “SMTC Corp.MarketWatch, last accessed August 14, 2020.)

The last two years’ revenue growth was driven by acquisitions by SMTC. The company will now need to focus on organic growth.

Revenues are estimated to rise by a marginal 2.9% to $383.2 million this year, followed by 9.6% to $419.9 million in 2021. (Source: “SMTC Corporation (SMTX),”Yahoo! Finance, last accessed August 14, 2020.)

SMTC reported positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in four of the past five years, including an impressive $24.0 million in 2019.

Fiscal Year EBITDA Growth
2015 $9.7 Million
2016 $7.1 Million -26.5%
2017 -$655,000 -107.8%
2018 $9.6 Million 1,830.5%
2019 $24.0 Million 149.4%

(Source: MarketWatch, op. cit.)

The issue for SMTC has been its inability to turn profits on both a generally accepted accounting principles (GAAP) and adjusted basis.

Fiscal Year GAAP Diluted Earnings Per Share Growth
2015 $0.00
2016 -$0.01 -4,900%
2017 -$0.47 -4,600%
2018 -$0.02 95.0%
2019 -$0.23 -895.3%

(Source: MarketWatch, op. cit.)

But there is some glimmer of hope in an otherwise dark situation. SMTC Corporation is estimated to turn an adjusted $0.18 per diluted share in profits this year and $0.38 per diluted share in 2021. (Source: Yahoo! Finance, op. cit.)

SMTC delivered positive free cash flow (FCF) in three of the last five years. The hope is that the company’s move toward profitability will drive FCF.

Fiscal Year Free Cash Flow Growth
2015 $8.2 Million
2016 $4.6 Million -43.3%
2017 -$10.3 Million -322.6%
2018 -$12.2 Million -18.2%
2019 $886,000 107.3%

(Source: MarketWatch, op. cit.)

Analyst Take

SMTC Corporation is one of the smaller EMS players, but that also means the company’s improving fundamentals could provide SMTC stock investors with much more upside potential.