This Manufacturing Services Provider Has Been Buying Back Its Own Shares

Every now and then, I like to keep track of companies that have been buying back their own shares. That’s because share buybacks may be a sign that a company’s stock is undervalued.

Peter Lynch, the legendary manager of the U.S.-based Fidelity Magellan Fund, also included buybacks as one of the criteria in his investing checklist. To Lynch, it’s a good sign if a company or its insiders are buying shares.

Of course, management may be tasking the company to buy back shares for other reasons other than its stock being undervalued (some other reasons would be to offset dilution). And even if management feels that the stock’s undervalued, they may well be wrong in their assessment too. But, companies that have been buying back their own shares are still worth digging further into.

With these in mind, let’s take a look at one company I’ve chosen at random from a list of companies that have been engaged in buybacks these past few weeks.

The company in question is AEM Holdings Ltd  (SGX: AWX). AEM is a company that provides solutions for equipment systems, precision components, and related manufacturing services across various industries.

The company has manufacturing plants in Singapore, Malaysia (Penang), and China (Suzhou), and sources its revenue from many countries such as the U.S., China, and Malaysia. It operates through three segments: Equipment systems solutions (ESS); Precision component solutions (PCS); and Others.

AEM has been buying back shares on seven occasions in the month of October thus far. All told, the company has bought back a total of 316,100 shares for nearly S$158,000.

The firm’s latest set of results (for the quarter ended 30 June 2016), saw strong growth. Revenue was up 51.1% to S$17 million while profit surged 186% to S$1.34 million. AEM credited higher sales to a key customer for its growth seen during the quarter.

In the earnings release, AEM’s chief executive, Charles Cher, commented on the company’s future outlook:

“The demand for our equipment continues to be strong looking into the 2nd half of this fiscal year, and we expect further positive growth in the business in that period. Nevertheless, we are mindful of the uncertainties present in the global macro economy so we continue to be operationally cautious while planning for anticipated growth.”

So, it appears that AEM’s management is expecting more growth for the rest of 2016. AEM’s shares last closed at S$0.51 each yesterday. At that price, the firm’s valued at merely 3.3 times its trailing earnings.

A Foolish conclusion

Companies that are engaged in share buybacks are just a good starting point for investors looking for opportunities. It’s up to the individual investor to dig further and determine for him or herself whether a company’s shares are actually cheap or not.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.