Time To Test Out Electro Optical Engineering

Jan.10.07 | About: EXFO, Inc. (EXFO)

Electro Optical Engineering (NASDAQ:EXFO) just reported a fantastic quarter. Revenues were up 31% year over year and profits jumped to $3.5 million from $0.4 million. Gross margins continued to improve as well and now sit at 57%.

Electro Optical Engineering provides test and measurement equipment for telecommunication carriers and cable operators to test and monitor fiber optic networks. Although competition is fierce for optical components, there are fewer players in the optical testing equipment market. At Wall Street Mayhem we believe that the optical testing market is the way to profit from the continued build out by companies wishing to expand their phone, cable, and internet offerings.

Competition between cable providers and traditional telcos is still heating up as these companies all hope to provide phone, cable, and internet service to consumers in one package deal. New fiber optic networks and increased capacity on existing networks are being installed at a rapid pace. Fiber to the home is still not available to the majority of US households and Verizon recently accounted that they will spend $18 billion to expand fiber to the home networks. All of these new networks need to be tested and Electro Optical’s test equipment continues to gain market share.

Electro Optical’s stock is up this morning about 7% to $6.05, but due to the strength in earnings and the reasonable forward P/E of about 16, Wall Street Mayhem believes this stock still has a long way to run. Electro Optical Engineering also has a strong balance sheet with $110 million in cash and no debt. The market cap of $415 million is also reasonable considering the growing profitability and stockpile of cash.

Electro Optical Engineering also has a life sciences division that makes precision electronic products used for biotechnology research. Although the life sciences division has not been growing at the same pace as the optical testing division, prospects for this division are solid as biotech research continues to expand.

Electro Optical Engineering is not widely followed on Wall Street. However, considering the recent growth in revenues and profits, and the industry growth in optical testing equipment, more analysts are likely to start coverage soon. Now is a great time to get into Electro Optical Engineering before the analysts have jumped on board.

* BUY EXFO at or under $6.10
* SELL EXFO at $7.50, set stop loss at $5