Emerging from the Global Slowdown

The 2009 recession hit The LGL Group (LGL) as well as the electronics manufacturing industry hard. LGL, which relies on a single product line, was not immune to the weak economic environment as 2009 revenue fell 22.1% year over year.

Despite the rough waters, however, the firm emerged stronger and leaner as cost structure was realigned, manufacturing was tapered to three global manufacturing plants and more high-end jobs were transferred overseas.

U.S. electronic equipment orders and shipments performed better than most of the world in 2009, thanks to the U.S.’s higher dependence on less volatile end markets (military, medical, instruments and controls). These markets offer much lower volumes compared to computers, mobile communications, consumer electronics and automotive sectors, which drive export-dependent Southeast Asia.

The firm currently competes in a fragmented market which management projects to be somewhere in the area of $4.0 billion. Broken down by geography, 26% of the business is aligned in North America, with 21% attributed to Europe and 50% in the Asia-Pacific region. The majority of this market (80%) supplies to the low-end standardized commodity market. What remains is the specialized components markets. This is where the firm competes, primarily in the Military Instrumentation, Space and Avionics market (MISA) and the telecommunications and Networking infrastructure segments.

A Footprint in the Fast-Growing MISA

New MISA contracts won in the second half of 2009 should begin to contribute significantly to revenue over the next two quarters. The contracts deal with military personnel protection and homeland security.

We feel LGL presents a unique investment opportunity based on the fact that LGL has a solid blue-chip customer portfolio, a high growth potential segment in MISA and a strategic plan for higher margins (value chain). The firm emerged from the economic downturn with a significantly lowered cost structure, and should continue to ride the momentum of MISA. The MISA segment should lead the global economy out of the recession and do so with higher margins.
 
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