Nam Tai Electronics (NYSE:NTE) ended 2011 by getting hit from all angles, and as a result year-end operating results suffered. The company is making a bet on a different strategic approach going forward. So far, investors are not convinced and continued deterioration in the balance is enough to warrant concern. Yet, if the company's shift towards higher growth lower margin businesses proves correct, the current setback may prove opportunistic.

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A New Path
For the 2011 fourth quarter, Nam Tai reported revenues of $145 million a 12.7% decline from the year ago period. For the full year, revenues were up 12.7% over 2010. The company lost $12.5 million from operations during the quarter versus an operating profit of $4.3 million in 2010. Yet, the quarter was fraught with expenses that could hurt results going forward. Margins were hit due to a combination of factors. One was the increased labor costs in China, which are increasing 23% in 2012 from 2011. Currency adjustments were also a factor; the strength in the Chinese renminbi meant that the company's reported results in dollars were lower.

The third reason for the margin decline was the company's strategic shift away from slow growth high margin products to higher growth lower margin products. Nam Tai makes a wide variety of electronics products used in the production of mobile phones, computers, cameras and other electronic components. Many of its components help make some of the world's leading smartphones including Google's (Nasdaq:GOOG) Android based phones. Nam Tai now wants to focus on higher growth lower margin products such as components for smartphones rather than making things like Bluetooth devices. When you consider the extraordinary growth that a company like Apple (Nasdaq:AAPL) is experiencing from selling iPhones and iPads, management certainly has the right idea. Now it's simply a matter of execution. (For related reading, see Market Disappointed With Google Quarter.)

Watching the Cash
Year over year, Nam Tai's cash balance, one of its key assets, declined from $228 million to $118 million. The company spent $65 million on expansion initiatives, $35 million on debt maturities and $9 million in dividends. The company is in the midst of two key expansion projects as part of its future growth plans. Investors will be watching the balance sheet as time progresses. Nam Tai is taking the all too common approach to taking a cash rich balance sheet and using to invest in growth. If those efforts prove disappointing, investors will be the ones caught holding the bag. A recent example is Trident Microsystems (OTCBB:TRIDQ), once a cash rich business that burned the cash and investors along with it. A year ago, Trident shares were trading for about $1.40, but now they trade for 27 cents as the company has voluntarily sought bankruptcy protection in hopes of saving the company.

The Bottom Line
Nam Tai is far removed from such a drastic step but the company is making a bet. So far, investors aren't biting; shares dropped over 10% on the earnings reports. Income investors may be attracted to the 4% yield but that will be the first to go if cash is needed for expansion. Current and potential investors should keep a close eye going forward.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

Tickers in this Article: NTE, GOOG, AAPL, TRIDQ

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