Electro-Sensors, Inc. :ELSE-US: Earnings Analysis: 2016 By the Numbers : March 31, 2017

Electro-Sensors, Inc. reports financial results for the year ended December 31, 2016.

We analyze the earnings along side the following peers of Electro-Sensors, Inc. – Cognex Corporation, FLIR Systems, Inc., Danaher Corporation, Emerson Electric Co., Hurco Companies, Inc., Vishay Precision Group, Inc. and AMETEK, Inc. (CGNX-US, FLIR-US, DHR-US, EMR-US, HURC-US, VPG-US and AME-US) that have also reported for this period.

Highlights

  • Gross margins widened from 52.58% to 54.80% compared to the same period last year, operating (EBITDA) margins now 6.82% from 8.36%.
  • Year-on-year change in operating cash flow of 164.05% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings rose compared to same period last year, despite decline in operating and pretax margins.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 7.09 7.64 7.04 6.54 6.5
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings 0.2 1.21 1.09 0.71 1.09
Earnings Growth (YOY) -83.36 10.97 54.96 -34.99 81.61
Net Margin 2.85 15.9 15.54 10.79 16.71
EPS 0.06 0.33 0.3 0.2 0.31
Return on Equity 1.66 10.3 9.6 6.27 10.04
Return on Assets 1.53 8.88 8.22 5.41 8.59

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Earnings Growth Analysis

The company’s earnings declined year-on-year largely because of the increases in operating costs. Its operating margins (EBITDA margins) went from 8.36% to 6.82%. This decline in earnings would have been worse except for the fact that the company showed improvement in gross margins, from 52.58% to 54.80%. For comparison, gross margins were 52.58% and EBITDA margins 8.36% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

ELSE-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 520.20, compared to last year’s level of 480.01 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

ELSE-US‘s change in operating cash flow of 164.05% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

Despite a decline in operating (EBIT) margins as well as a decline in pretax margins, the company’s earnings rose.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Electro-Sensors, Inc. engages in manufacturing and selling of monitoring systems that measure actual machine production and operation rates. It operates through the Production Monitoring and Investments segments. The Production Monitoring segment offers manufacturing and marketing line of production monitoring equipment. The Investments segment includes investments in marketable and non-marketable securities. The company was founded by James P. Slattery in 1965 and is headquartered in Minnetonka, MN.

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