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Does Littelfuse justify the recent run-up?

Littelfuse (LFUS) has showed up as a selection in our Alert HQ lists twice now. The first time was in February based on daily price performance data . Just recently it popped up in our scan based on weekly data.

LFUS exhibits a classic chart showing a prolonged decline culminating in a reversal to the upside. Why the reversal? What is driving this run-up in the stock's price?

Background --

Littelfuse, Inc. manufactures and sells circuit protection and electrical fuses for the electronic, automotive, and electrical markets in the Americas, Europe, and Asia-Pacific. It offers electronic circuit protection products, such as fuses and protectors, positive temperature coefficient resettable fuses, varistors, polymer electrostatic discharge suppressors, discrete transient voltage suppression (TVS) diodes, TVS diode arrays and protection thyristors, gas discharge tubes, power switching components, and fuseholders, blocks, and related accessories.

In the electronics market, the company supplies leading manufacturers such as Alcatel-Lucent, Celestica, Delta, Flextronics, Foxconn, Hewlett-Packard, Huawei, IBM, Intel, Jabil, LG, Motorola, Nokia, Panasonic, Quanta, Samsung, Sanmina-SCI, Seagate, Siemens and Sony.

The company is also the leading provider of circuit protection for the automotive industry and the third largest producer of electrical fuses in North America. In the automotive market, the Company's end customers include major automotive manufacturers in North America, Europe and Asia such as BMW, Chrysler, Daimler, Ford Motor, General Motors, Honda Motor, Hyundai and Toyota. The company also supplies wiring harness manufacturers and auto parts suppliers worldwide, including Alcoa Automotive, Auto Zone, Delphi, Lear, Pep Boys, Siemens VDO, Sumitomo, Valeo and Yazaki. In the electrical market, the company supplies customers such as Abbott, Carrier, Dow Chemical, DuPont, GE, General Motors, Heinz, International Paper, John Deere, Lithonia Lighting, Marconi, Merck, Otis Elevator, Poland Springs, Procter & Gamble, Rockwell and 3M.

The Numbers --

In early February the company released their earnings report for the 4th quarter and for the entire 2007 fiscal year. Results were somewhat mixed but leaned to the positive side.

Sales increased 6% over the fourth quarter of the previous year and adjusted diluted earnings per share of $0.38 increased 52% over the prior year adjusted earnings per share of $0.25. Full year 2007 sales were just over $536 million up only slightly from 2006, but still a new record for the company.

Analysts, on average, were expecting a profit of 36 cents per share in the 4th quarter, according to a poll by Thomson Financial. To the company's credit, they managed to beat expectations.

Gross profit was $171.5 million or 32.0% of sales in 2007 compared to $161.3 million or 30.2% of sales in 2006. The gross profit margin percentage improvement resulted primarily from lower restructuring charges in 2007 compared to 2006.

Operating income in 2007 increased 77.8% to $51.3 million or 9.6% of sales compared to $28.9 million or 5.4% of sales in the prior year. The changes in operating income and operating margin were due mainly to lower restructuring charges and decreased bonus expense in 2007 as described above.

Net income in 2007 was $36,835,000 compared to $23,824,000 in 2006.

Income per share in 2007 was $1.64 versus $1.06 in 2006.

Though the electronics segment did not grow as strongly as expected, the company achieved record growth in the automotive and electrical segments. Geographically, there was strong growth in Asia, especially China and India. In the off-road truck and bus segment, a relatively new area for the company, they achieved strong double digit growth in 2007 over the prior year.

Looking Forward --

Sales for the first quarter of 2008 are expected to be in the range of $134 million to $138 million which represents 2% to 5% growth over the prior year quarter.

Earnings for the first quarter are expected to be in the range of $0.32 to $0.37 per share. Sales for the year of 2008 are expected to increase 5% to 7% compared to 2007. For the second half of the year, being stronger than the first half due primarily to increasing new product sales, diluted earnings per share for the year 2008 are expected to be in the range of $1.80 to $1.90. Earnings are expected to be stronger in the back half of the year due to higher sales and increased cost savings.

The company has initiated a series of projects beginning in 2005 to reduce costs in its global operations by consolidating manufacturing and distribution into fewer sites in low-cost locations in China, the Philippines and Mexico. 2008 will be another transition year in which expenses and capital spending related to the manufacturing transfers continue to impact margins while savings from these transfers are only beginning to ramp up. In 2009, the savings are expected to increase substantially and the transfer cost will begin to decline. As a result, earnings are expected to increase to $2.50 per share in 2009. Cash flow should return to more normal levels.

Conclusion --

The company operates in what might seem to be a mundane sector; however, much of today's increasingly complicated and sensitive electronics equipment relies on circuit protection. Whether the electronics are in cars, factories, TVs or in your your basement or your pocket, there is a good chance that one or more circuit protection devices are included. The market for these devices is large and growing.

LittelFuse seems to be on a path to increased profitability. The aggressive strategy to reduce costs and an emphasis on new products will yield payback in the near future. In the meantime, the company is taking advantage of strong growth trends in flat panel TV sales and laptop PC sales and ramping up in newer markets like off-road vehicles and buses. The company's sales are geographically dispersed. While the U.S. may see a slowdown in passenger car sales, for example, management predicts continued strong growth in Asia.

With the company already up 16% from when we first recommended them on Feb 23 at $31.04, there seems to be a good chance the stock is ready to take a rest. It may be a good buying opportunity.

Disclosure: author has no position in LFUS

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