Hit hard, but still delivering the goods

Shares of the Wayzata-based electronics manufacturer dropped more than 75 percent in less than three months -- from early August to late October -- even though Degan insists that "not one fundamental factor had changed. Our financial performance has been very consistent."

The stock (NSYS) rose steadily this summer to a high of $14.75 in early August, then made a rapid retreat to a low of $3.40 on Oct. 30. The stock closed Friday at $5.11 a share. It has a price/earnings ratio of about 6.5.

Nortech remains profitable and has been posting increasing earnings and revenue each quarter despite the economic slowdown.

In its third-quarter earnings report issued this month, Nortech said that operating earnings were up 31 percent for the first nine months of 2008, net earnings were up 56 percent and revenue was up 7 percent. For the quarter, revenue was up 7 percent and earnings were up 19 percent.

"We think our company is significantly undervalued in the market," Degan said.

"Our market price is well below book value." The company's book value is about $8.10 per share, well above the recent price.

Degan admits that Nortech's battered stock is a source of frustration. "That's why we don't spend a lot of effort focusing on the stock price. Management is focused on the things we can control -- growing the company properly and doing the right things for our people," he said.

Specialty manufacturer

Nortech Systems was originally a division of Control Data Inc. that was spun off in 1979 as Digigraphic Systems. The name was changed to DSC-Nortech in 1988. The company filed Chapter 11 bankruptcy in 1990 and emerged later that year as Nortech Systems.

Nortech specializes in electronics manufacturing, providing custom designed products. "We're a low-volume, high-mix manufacturer," Nortech CFO Richard Wasielewski said. The company produces a variety of electronic parts and assemblies for its clients in small runs. "We might produce 5,000 to 6,000 of a particular assembly or as little as one to 10 items," he added.

For instance, Nortech produces the global positioning system devices for all of General Electric's locomotives, and it produces specialty assemblies for GE Medical, such as the cables that connect MRI tables with control panels. Nortech also produces cables for the communications systems installed in the Humvee vehicles used by the military in Iraq.

Nortech focuses on three primary industry segments -- aerospace and defense, medical technology and industrial. "The industries we're in generate more than $150 billion in annual revenue, and that is expected to grow to about $258 billion by 2011," Degan said. "The segments we focus on are expected to grow from about $17 billion to $30 billion during that time."

Degan believes that tying his company's focus to the fastest-growing industrial segments will help accelerate Nortech's growth.

"We think these segments offer a better business opportunity for us, they are less subject to offshore competition, and they represent the highest-growth segments of their industries."

Because of the short-run, quick-turnaround nature of its business, Nortech does almost all its manufacturing in domestic plants, including five in Minnesota. It has a facility in Bemidji, two in the Brainerd area, one in Fairmont and one in Blue Earth. The company has only one plant outside the United States, in Monterey, Mexico, although it does have a manufacturing partner in China.

Despite the slowing economy, Degan is upbeat about the future. But he's realistic.

"We expect to have a strong year, but we'd be naive to think that the slow economy won't catch up with us. We've seen some signs of a slowdown, particularly in the industrial segment, but we expect medical and defense to remain fairly strong."

Falling commodity prices could help Nortech boost its profit margin. "We think the drop in oil and copper prices should help us by the first quarter of 2009," Wasielewski said.

But as the economy slows, Degan expects the competition to heat up. "There will be more companies competing for fewer opportunities. But, without anticipating what the microeconomic impact will be [from the recession], we should be able to continue to exceed the growth of our industry, which is projected to grow at an annual rate of 8 to 10 percent."

Whether the stock price follows suit is anybody's guess.

Gene Walden lives in the Twin Cities and is the author of more than 20 books about business and investing. Send questions or comments to: gwalden100@comcast.net.