Take a Second Look at LGL - Analyst Blog

Ken Nagy, CFA

Take a Second Look at LGL

LGL Group (LGL), through its subsidiaries manufactures custom-designed highly engineered electronic components. Beyond its blue chip customer base the firm has significant opportunity for growth in specialty products in the military instrumentation and space avionics market (MISA) as well as high growth emerging areas such as India and China. Further the firm’s long-term goals include plans to diversify away from strictly selling components and to be included higher in the value chain through strategic partnerships

Emerging from the global slowdown.
The 2009 recession hit LGL as well as the 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 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 SE 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.

Strong first 9 months in 2010