* All data are as of mid-day Monday, December 8, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
The Computer Based Systems industry may not be one of the technology sector's higher flying success stories, but within the space you can find some individual companies that are promising some very high earnings growth estimates, which are among the weightier metrics influencing stock price appreciation. For this reason, analysts have some very high price targets for many of the stocks in this space.
Let's first understand what exactly the companies in this industry offer, starting with the largest three U.S.-based components.
• Lexmark International Inc. (NYSE: LXK), headquartered in Lexington, Kentucky, develops, manufactures and supplies printing, imaging, device management, managed print services (MPS), document workflow, and business process and content management solutions. It offers monochrome and color laser, ink-jet and to matrix printers, as well as a range of cartridges, service parts, and other print and imaging supplies. It also provides maintenance, consulting, and systems integration services, asset lifecycle management, implementation and decommissioning services, consumables management, remote device monitoring and management, and business process optimization services, service primarily the financial services, retail, manufacturing, education, government, and health care industries.
• Ruckus Wireless, Inc. (NYSE: RKUS), headquartered in Sunnyvale, California, provides carrier-class Wi-Fi solutions, including gateways, controllers, and access points with related software and services, the integration of Wi-Fi and other services into service provider network infrastructure, as well as Smart WLAN controllers that streamline the configuration and management of its access points. It also provides support for various virtual WLANs, Wi-Fi encryption, advanced traffic handling, outdoor Smart Wi-Fi access points, and point-to-point and multi-point bridges, as well as a software-based Wi-Fi management service platform for monitoring and administering networks. Its client-base includes companies in the hospitality, education, healthcare, warehousing and logistics, corporate enterprise, and retail industries, as well as state and local governments, public venues such as stadiums and convention centers, airports, and outdoor public areas.
• Daktronics Inc. (NASDAQ: DAKT), headquartered in Brookings, South Dakota, designs, manufactures, and sells electronic display systems and related products, offering video display systems, LED architectural lighting, video and display products, scoring and timing products including indoor and outdoor scoreboards for various sports, digit displays, scoring and timing controllers, statistics software, and timing systems for sports events, primarily aquatics and track competitions, as well as swimming touch pads, race start systems, and relay take-off platforms. It also provides message displays and electronic signs for road management, parking, mass transit, aviation and advertising applications.
Investors interested in the Computer Based Systems industry will have been rather disappointed with it lately, as graphed below. Since the economic recovery began in early 2009, where the S&P 500 index [black] has gained some 205% and the SPDR Technology Sector ETF (NYSE: XLK) [blue] has gained 220%, all three of the largest U.S. companies in the industry have failed to keep up with either benchmark, with Lexmark [beige] rising 180%, Daktronics [orange] rising 104%, and Ruckus [purple] causing a real ruckus among investors as it lost 2% during its two-year public life.
Yet the future may be looking brighter for the Computer Based Systems industry as a whole, which is expected to outgrow the broader market's average earnings rather robustly, as tabled below where green indicates outperformance while yellow denotes underperformance.
Once the industry gets past an underperforming current quarter, it is seen outgrowing the S&P's growth rate at some 1.63 times next quarter, rising to 2.46 times in 2015, and then calming back down to 1.65 times annually over the next five years.
Zooming-in a little closer, the three largest companies in the industry are expected to split perform with a little surprise, as tabled below.
Where Lexmark once lead the others, it now looks to stagnate in earnings for the foreseeable future, even posting earnings shrinkage for this quarter and 2015.
The others, however, are expected to vastly outgrow both Lexmark and the S&P average growth rate straight across the calendar, with previously trailing Ruckus leading Daktronics this quarter and in 2015, beating the broader market with growth ranging from 1.86 to 5.62 times, while Daktronics' growth ranges from 1.61 to 14.93 times the market's average.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Ruckus generated the greatest revenue and earnings growth year-over-year, and by quite an astronomical degree, while Lexmark and Daktronics split the least growth between them, with Daktronics reporting earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Lexmark operated with the widest profit and operating margins, while Ruckus contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Lexmark's management team delivered the greatest returns on assets and equity, while Ruckus' team delivered the least.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Lexmark provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Ruckus' DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Lexmark's stock is cheapest relative to forward earnings and company book value, where Daktronics' stock is cheapest relative to 5-year PEG. At the overpriced end of the scale, Ruckus' stock is the most overvalued relative to earnings and book, while Lexmark's is the most overvalued relative to PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Lexmark offers the highest percentages of earnings over current stock price for all time periods. At the low end of the spectrum, Daktronics offers the least percentage for the current quarter, where Ruckus offers it for the remaining periods.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Ruckus offers the greatest earnings growth in the current quarter and 2015, where Daktronics offers it next quarter and over the next five years. At the low growth end of the scale, Lexmark offers the slowest growth overall, with shrinkage projected for the current quarter and 2015.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Lexmark's stock offers the least upside potential and greatest downside risk, while Ruckus' stock offers the greatest upside and Daktronics' offers the least downside.
It must be noted, however, that Daktronics' stock is already trading below its low target. While this may mean an increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Daktronics is best recommended with 2 strong buys and 0 buy representing a combined 66.67% of its 3 analysts, followed by Ruckus with 5 strong buy and 8 buy ratings representing 61.91% of its 21 analysts, and lastly by Lexmark with 0 strong buy and 1 buy recommendation representing 9.09% of its 11 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Lexmark by a narrow lead, outperforming in 16 metrics and underperforming in 13 for a net score of +3, followed very close behind by Daktronics, outperforming in 6 metrics and underperforming in 4 for a net score of +2, with Ruckus a distance third, outperforming in 10 metrics and underperforming in 14 for a net score of -4.
Where the Computer Based Systems industry is expected to underperform the S&P broader market significantly this quarter, then outperform significantly next quarter and in 2015, and meaningfully beyond, the three largest companies in the space are expected to split perform in earnings growth versus the broader market, with Lexmark stagnating, and Ruckus and Daktronics alternating outperformances.
Yet after taking all company fundamentals into account, Lexmark prints up the best financials overall, given its lowest stock price to forward earnings and 5-year PEG, highest cash and revenue over market cap, widest profit and operating margins, highest returns on assets and equity, highest EBITDA over market cap and revenue, highest diluted earnings over current stock price, highest future earnings over current stock price for all periods, and highest dividend - narrowly winning the Computer Based Systems industry competition.