EXFO Passes This Key Test
There's no foolproof way to know the future for EXFO (NAS: EXFO) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.
A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.
Why might an upstanding firm like EXFO do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.
Is EXFO sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:
Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.
The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above.
Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.
|Panasonic (NYS: PC)||$26,922||47|
|Agilent Technologies (NYS: A)||$1,728||47|
|JDS Uniphase (NAS: JDSU)||$421||67|
Source: S&P Capital IQ. DSO calculated from average AR. Data is current as of last fully reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.
Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will EXFO miss its numbers in the next quarter or two?
I don't think so. AR and DSO look healthy. For the last fully reported fiscal quarter, EXFO's year-over-year revenue grew 10%, and its AR dropped 10%. That looks OK. End-of-quarter DSO decreased 18.2% from the prior-year quarter. It was down 6.7% versus the prior quarter. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.
- Add EXFO to My Watchlist.
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- Add Agilent Technologies to My Watchlist.
- Add JDS Uniphase to My Watchlist.
At the time this article was published