Bel Fuse Inc. (NASDAQ:BELFB) piqued my interest late last year because of its position in the 5G area, its wide portfolio of high-margin solutions, and good and stable fundamentals despite the adverse economic environment. The company has surpassed EPS forecasts for the last eight quarters, most recently in Q1 2023 with a $0.40 EPS surprise to reach $1.15.

This is a $523.60 million market cap small-cap stock that has been increasing its top and bottom lines. It has very low short interest at 0.15% and an appealing FWD price-to-earnings ratio of 9.91, compared to the sector norm of 19.00. Since 2021, the company has undergone leadership and strategy changes, resulting in record-breaking sales, better margins, reduced leverage, and 155.40% returns for investors. Based on its success in the first quarter of 2023, the management team has increased its full-year forecast for 2023. As a result, I continue to be bullish on this stock as it benefits from robust demand and greater productivity.

Highlights for the First Quarter of 2023

Bel Fuse is an electric component firm that caters to a variety of end markets by offering solutions focusing on three major areas. Across all businesses, we can see an upward-trending growth pattern. Improved production and growing demand from aerospace, military, and e-mobility customers have benefited the company.

Following a strong fiscal 2022 finish, Bel Fuse has continued to strengthen its top and bottom line fundamentals heading into Q1 2023. Net sales climbed by 26.1% year on year to $172.3 million, gross profit margin increased from 25.0% to 31.1%, and adjusted EBITDA was $28.1 million, representing 16.3% of total sales compared to 8.5% in Q1 2022.

Bel Fuse has seen double-digit revenue growth in all of its areas, with the exception of magnetic solutions, which climbed by 4.5%. The power solutions and protection category are especially important, accounting for nearly half of the overall revenues in Q1 2023. The company has benefited from high demand in commercial aerospace, which increased 135% year on year, and defense clients, which increased 14% year on year. Bel Fuse has also improved cost management by streamlining its operations. In the power solutions category, the company has expanded output due to the greater availability of crucial components, which will fuel future growth.

According to the balance statement, the company has $77.8 million in total cash and a $87.5 million credit facility, which was recently cut by $12.5 million. This is a considerable improvement over last year. The company’s liquidity is indicated by a current ratio of 2.95 and a quick ratio of 1.44. While free cash flow has been inconsistent, it has been positive for the past four quarters, with a free cash flow of $13.1 million in the first quarter of 2023. Based on their performance, management expects sales to range between $162 to $170 million in the second quarter of 2023.

Valuation

Except for Needham, which recently raised its price target from $40 to $50, there has been little analyst interest in this small-cap stock. The market reacted positively to Bel Fuse’s most recent earnings report, with the stock price rising 38.87% in the last five days but remaining below its analyst price target of $50.50. Furthermore, the stock has almost no short interest, and double-digit YoY growth, and has consistently outperformed the S&P 500 index over the last year.

When compared to the information technology sector, it has a low FWD price-to-earnings ratio of 9.91. It also has a low price-to-sales ratio of 0.78, indicating that investors are getting more for their money.

Risks

Bel Fuse is a small-cap stock that is prone to market swings and thus riskier as an investment. Furthermore, as an international company, it is affected by geopolitical factors such as rising tensions between China and the United States, which have an impact on its business and potential customer base. Changes in trade policies or greater sanctions could have a significant impact on the company’s future growth prospects, especially given that China accounts for roughly 70% of its revenue.

Conclusion

Regardless of economic or geopolitical conditions, Bel Fuse has performed successfully in terms of both revenue and profit for eight straight quarters. The company is convinced that it will continue to provide good profitability in the short term due to increased demand from large customers and improved availability of critical components, while also playing a significant role in global 5G connectivity in the long run. Despite being wary of its international playing field, the company has implemented key business strategies that have benefited its diverse customer base. As a result, I’m still bullish on this fascinating small-cap stock.

Featured Image: Unsplash @ Andrew Ruiz

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