Cray's Free Cash Flow Turning Positive (CRAY)

| About: Cray Inc (CRAY)

In October of 2003, I stated in a Seattle Post-Intelligencer newspaper article that Cray (NASDAQ:CRAY), which was then trading at $12.03, was on the brink of collapse. When questioned as to why my firm ( had a negative outlook for CRAY, I stated that "If it [negative cash flow] doesn't change, something very bad could happen to this company."

At that time CRAY had been reporting record EPS results and its shares had four buy ratings and no sell ratings by securities analysts. In the article Cray's CFO questioned my assessment by saying: "With these kinds of firms that look simply at data, they don't really get the full picture."

CRAY's shares responded by losing over 90% of their value when they hit a five year low of $.85 in September of 2005. On May 15, 2006, we changed our outlook from negative to positive for the first time in five years.

Cray, Inc. engages in the design, development, marketing, and servicing of high performance computer [HPC] systems, commonly known as supercomputers.

I now like CRAY for the following reasons:

1. My macro cash flow data on the major indices such as the S&P 500, Dow Jones 30 Industrials and the NASDAQ 100 is predicting that there will be a downturn in earnings on the horizon. I believe that this will start to be reflected in the third or fourth quarters of 2006. Given this scenario, I believe that investors should be positioned in those companies which could have positive versus negative comparisons in Q4 of 2006.

2. CRAY's cash flow fundamentals have shown significant improvement over the last three quarters. Its cash flow metrics have also gone from a negative to a positive comparison for the first time in at least 5 years.

3. CRAY's revenue in each of its most recent two quarters was up by at least 35% after six consecutive previous quarters of decline.

4. CRAY shares are trading much closer to ten year lows ($1.84) than they are to ten year highs ($18.19).

Below is the 5 year free cash flow chart (click to enlarge):

We need to look at the 20 quarter chart to get the real picture. Look at the free cash yield (line 10) -- it is 16.9%. The free cash yield trailing tweleve months growth is 125.8% and free cash margin percentage is 12.8%. These are the highest numbers in each category over the last 5 years. I believe this stock will head north in a big way at some point over the next 6 to 9 months:


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