Forward Industries Moat Check

The next company on the Magic Formula list is Forward Industries (FORD). Forward Industries designs and sells cases, bags, clips, hand straps, faceplates and other accessories for consumer electronics and medical equipment.

Let’s take a look at the big five numbers.  These factors include ROIC, book value growth, earnings per share growth, sales growth, and free cash flow growth over the past five years. I checked Forward Industries’ financials on ADVFN. ROIC last year was 41.3 percent and it was 27.5 percent on average over the past five years.  Book value per share has grown by an amazing 56% per year from $0.49 in 2001 to $2.92 per share in 2005.  Earning per share however has been a different story.  Earning per share had gone from $-0.33 in 2001 to $1.37 in 2005.  This last quarter however earnings growth has become negative.  Revenue growth has been an average of 28.7 percent over the past five years, but has declined in the recent quarter.  Finally, free cash flow has gone from -$0.7 million in 2001 to $7.0 million in 2005.  All five number seem to indicate a wide moat, but in the last quarter these numbers have weakened.

One thing to note is that OEM customers account for 97 percent of Forward Industries’ sales. I don’t think that OEM customers are likely to be brand loyal.  Forward Industries has approximately 200 active customers.  Five of their customers accounted for approximately 88% of their total net sales in Fiscal 2005. These major customers include Motorola (MOT) and Nokia (NOK) for cell phone products and Abbott Laboratories (ABT), Bayer Healthcare (BAY), and Lifescan for carrying cases for diabetic monitoring kits.

So what is Forward Industries competitive advantage?  I believe that it is associated with the fact that they do not manufacture any of the products that they sell and distribute. Forward Industries’ subsidiary Koszegi Asia’s ability to source quality cases in China on short lead times is probably what has made them so profitable in the past.  

The carry case industry however is very competitive.  Forward Industries estimates that they compete with approximately 1,500 producers and distributors throughout the world.  Forward Industries believes that they can sustain their competitive position through maintenance of an extensive product design capability, rapid response time to customer requests for proposals and product shipment, competitive pricing, reliable product delivery, and product quality. They believe that their ability to compete based on product quality assurance considerations is enhanced by the local presence of their Hong Kong and outsourced Chinese quality control and shipment facilities.  My question is are any of their competitors currently also using Chinese production with a local presence? I would also like to know how costly it would be to create a similar local presence quality control system in China for the carry case industry.

If the answer to these two questions indicates that Forward Industries doesn’t face a direct threat to their current competitive edge, I would label this company a wide moat company. A recent comment by Forward Chief Executive Officer Jerome E. Ball indicated sales and profit were adversely affected by unit pricing pressure in the past quarter.  That doesn’t sound positive, but it is also only one quarter.

Given that Forward Industries only has a market cap of $66 million, I would probably cut them some slack in determining whether the have a wide moat.  I would be very interested in hearing your comments on this company.  As you can tell, I’m kind of sitting on the fence on this one.

9 thoughts on “Forward Industries Moat Check

  • February 13, 2006 at 9:13 pm

    I don’t believe there’s any competitve advantage here. Motorola, it appears, is asking FORD to set up a hub.

    FORD would ship product to the hub, but not record a sale until Motorola took product out of the hub. Net-net it would appear FORD will be stuck carrying inventory a little longer on its books.

    Furthermore, it was a turn-off to me to see the large increase in shares outstanding that resulted from the exercising of stock options.

    I’ll admit it’s temptingly cheap and perhaps a speculative position-size is warranted. But, buyer beware!


  • February 13, 2006 at 9:54 pm

    Ryan –
    Thank you for those excellent observations. I didn’t realize Motorola was putting pressure on Forward Industries. It definitely gives me pause.

    I hadn’t started digging into the corporate governance issues associated with FORD. I definitely don’t like large increases in shares associated with the exercise of stock options.

    High quality comments like this one deserve rewarding.  If you are interested, I’ll send you access to Fat Pitch Financials Contributor’s Corner for one week.

  • February 16, 2006 at 12:06 am

    The thing about Magic Formula isn’t whether they have a wide moat. It’s all about ROIC and PE’s.

    And I think that if you really start to look at outperformance in the market, the PE is the determining factor. If you look at alot of the companies in Magic Formula, many have distressed PEs, relative to recent historical for that company. Looking at the companies, a disporportionate amount seem to have had some type of legal trouble and hence – a distressed PE.

    On average, the E sorts itself out [as the legal situation or market situation isn’t found to be quite as tough as thought], the ROIC (although it might dimish slightly, remains relatively high) and eventually, the P responds, by moving up. I think its that simple.

    y high,

  • February 16, 2006 at 12:10 am

    By the way, I couldn’t see the bottom of my comments, once I’d reached the bottom of the box (it was therefore impossible to edit or revise with guessing). Is that normal, or just a localized problem I’m having?

  • March 27, 2006 at 7:13 pm

    all very interesting comments, another things there is a 32% short interest of the float on FORD….

  • August 1, 2006 at 9:02 am

    RG ……..wrong Ford. Chuckster

  • June 28, 2007 at 9:13 pm

    Don’t confuse ROIC with moat. All companies that have high ROIC doesn’t necessarily have a moat, BUT ALL companies that have a moat have a high ROIC. For example Forward Ind. has NO MOAT at all. Their business can easily be copy by competitors and their margins will be reduced. A big moat company for example is UST or Moodys. Any observer if evaluating things objectively can clearly see that UST and Moodys will dominate their markets in 10, 20, 30, etc years. No matter how much money a competitor invests it won’t make a dent in USG or Moodys. Moodys will most probable have higher ROIC 20 years from now than now. You just need to wait the market take down these companies and buy when historical earnings/treasury yield is below much less than current interest rates. For example in 2000 the foolish market took USG very low, if you bought you would have had 100% in a year. You just need to be patient, patience pays in investing big time. McDonalds is another example of a big moat, no matter where americans go they can’t leave their place of visit without going to McDs. Also no matter where you go, you know there’s a McDs around and if you haven’t had breakfast and you’re late to work you know McDs is fast and you will look for one. This is a huge competitive advantage. McDs has sustain this for a long time and they continue putting in it in kids minds. Is a cultural thing. The foolish market took this great company very down in 2002, since then it had quadrupled! Just be patient there’s going to be more quasimonopolies taken down by the foolish market in the future. Just keep in mind which are these companies with huge advantages. You don’t need to be expert in all fields. Just look at the fields you can understand better. For example if you study Buffett you will see that most of the money he had made had come from less than 10 industries, very simple industries that you and I and anyone can understand and can understand the key players. Industries he had invested are: banking, insurance, lending, beverages, tobacco, media, industrial products, transportation and retailers. You can easily from these industries without reading anything knows who has HUGE MOATS, I can tell you some: Wells Fargo, American Express, Coca Cola, Pepsi, Marlboro, British Tobacco, Budweiser, Ingersoll Rand, UPS, Walmart, McDonalds, etc. Keep looking for moats and then wait for the big drop and get in!

    Take care,


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