Plug Into EXFO Inc

| About: EXFO Inc. (EXFO)

Summary

Impressive Y/Y growth.

Strong earnings projections for 2017.

Extremely undervalued for current projections.

All info is pulled from its most recent filings.

Earnings release

Financial statements

Overview

EXFO Inc EXFO is a Quebec-based company that designs and manufactures network solutions for both fixed and mobile networks. The company offers multiple services, including 4G/LTE wireless backhaul, DAS systems, fiber to the home/curb/node (FTTH/FTTC/FTTN) deployments. It also offers service assurance for IP, 2G and 3G networks.

EXFO just announced its Q4/EOY earnings, ending on August 31st, on October 12th. On the subsequent trading day, the stock jumped 4.69%.

Chairman of the board and Chief Executive Officer Germain Lamonde was quoted in the earnings release as saying, "...we are well positioned to sustain profitable growth in 2017 as the pace of network transformation is accelerating. With a heightened focus on execution, disciplined spending and improving our gross margin, I am confident we will increase adjusted EBITDA faster than revenue to achieve at least US$26 million in 2017."

Books

Income Statement

Total sales for EXFO grew an impressive 11.07% year-over-year and 3.22% quarter-over-quarter. EXFO also increased in both of its main sales categories, physical layer and protocol layer sales, on a year-over-year basis. On a smaller note, gross margins increased by 0.4% from 2015 to 2016 Q4 results.

For year-end results, EXFO increased revenue 4.73%, going from approximately $222 million in sales in 2015 to $232.5 million in sales 2016. Book to bill ratio also increased by 3% on a year-over-year basis increasing from 1.00 in 2015 to 1.03 in 2016. Growing net earnings from approximately $5.3 million in 2015 to $8.9 million in 2016, EXFO pulled an amazing feat of 68% growth.

According to the CEO, they are confident that the company can achieve $26 million in adjusted EBITDA in 2017. Net income has been approximately 38-40% of adjusted EBITDA. Picking a middle ground of 39%, we can assume that the CEO believes the company can achieve a net income of approximately $10.14 million in 2017. This would be the third year in a row that EXFO has achieved double-digit growth in its net income.

Balance Sheet

EXFO's assets grew 9.27% from $219 million to $239 million. This growth was mainly fueled by large increases in cash and short term-investments - both increased 67% and 174%, respectively.

On the flip side, the company's liabilities grew 16.87% and were caused by an increase in its accounts payable and deferred income taxes, both increased by 8.9% and 87.5%, respectively. The company's recoverable tax credits outnumber its tax liabilities on a 3:2 basis.

EXFO bettered its current financial position as its current ratio increased from 3.29 to 3.63, from 2015 to 2016. Finally, its retained earnings increased from approximately $119 million to $128 million.

Cash Flow Statement

Cash flow from operating activities increased a substantial 375% from 2015 to 2016, going from $6.484 million to $24.363 million. Net change in cash increased from ($28.57) million to ($3.03) million.

Valuation

Price To Earnings

On a trailing-twelve-month basis, EXFO is valued at a price to earnings of 10.38. Also, on a forward-twelve-month basis, assuming that its adjusted EBITDA is correct, its P/E would be 9.11. Both valuations show EXFO on a lower than industry average basis, which is 20.03.

Dividend yield

EXFO has never paid a dividend. With earnings growth that has happened over the past year and the growth projected for the future, a dividend isn't unlikely for the future. However, with earnings growth this impressive, investors are most likely to get the highest return from EXFO's earnings being reinvested.

RISKS

Earnings Don't Follow Through

Always an issue for companies is if their quarterly/yearly earnings do not fall in line with their or analysts' expectations. The large growth that EXFO has experienced in the past is hard to sustain. Its current EBITDA growth this year is approximately 13-14%. Investors should be careful of companies with lofty goals. If they do reach their goals, the stock returns can be impressive, however if they do not reach their goals, the punishment can be twice as harmful.

EBITDA Growth

The CEO mentions in the earnings release that EBITDA is growing faster than revenue. This means that this double-digit growth in EBITDA cannot continue until the company starts to massively expand its top line as well. From 2015-2016, revenue grew 8.22%. The gap between revenue and EBITDA can only be pushed so thin. Investors should not expect this EBITDA growth to continue for very long, unless EXFO can expand its product line or tap into a new market quickly.

Conclusion

Company Rating

I grade this company as an A. (Guide to my company ratings is posted in my instablog.) The company has strong earnings growth. Virtually every aspect is looking up for this company. With continued double-digit growth from this company, it is only a matter of time before this diamond in the rough is discovered.

Ways to Invest

There are not options available for this company. However, with the current stock price at $4.01, it is relatively easy for even the modest investor to get in on this deal.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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