This column was originally published on RealMoney on July 25 at 4:29 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.After a getaway weekend with the boys, I feel broken. Temporary or terminal? Remains to be seen, but if history is any indication, I will be back stronger than ever. Some companies suffer similar fates -- a rough patch that puts the stocks in the proverbial sick bay. Sometimes the short-term challenges are just too great. I have three stocks for you today that have gone through their own versions of a weekend binge of scandalous behavior, but I believe they have the tenacity to make a strong comeback: Faro Technologies ( FARO), Merge Technologies ( MRGE) and Tier Technologies ( TIER) I find music can soothe most ills, be they hangover- or market-related. While some might find comfort in gentle or calming sounds, nothing puts me back in the swing like some heavy rock 'n' roll, and nobody delivers more consistently than Dave Mustaine and Megadeth. Let's throw on a random shuffle of the albums "Peace Sells" and "The System has Failed" and give these companies the inspiration they need to reinvigorate their respective stock prices. Faro Technologies makes computerized measurement and inspection systems that are used to produce exact specs for replacement parts, manufacturing quality control and reverse engineering. Applications for its products are diverse and sales growth has been impressive. The trouble is, the company ran into some profitability issues, disappointing the Street several times. Allegations that its salespeople in China may have paid kickbacks to government officials and a patent dispute with rival Hexagon Metrology of Sweden conspired to take the company's shares from the low $30s in January 2005 to a 52-week low of $11.70 last month, when it looked as if it might be delisted by the Nasdaq. Since reporting first-quarter earnings on June 29, the shares have rebounded to $15, where I believe the company merits consideration as a longer-term investment.
Faro's technology is complementary to that of Stratasys ( SSYS), which I've
written about before -- both are part of a revolution that is changing manufacturing and design. Computer-assisted design has shortened design and manufacturing cycles. Now that the majority of engineering and design is done in 3D CAD environments, flexibility and functionality is expanding rapidly. As Stratasys allows for rapid creation of models of 3D designs, Faro allows for objects to be measured into that 3D environment for modification, quality inspection or duplication. I can envision a day when this type of product transitions into the consumer space. We may all have devices at home enabling us to measure objects and reproduce variations using CAD and a home rapid-manufacture printer. Regardless of future product incarnations, opportunities for growth in traditional manufacturing remain impressive. The adoption by the automotive industry of QS-9000 in 1994 required much more precise quality inspection in the manufacturing process. Traditional measurement devices like scales, calipers, micrometers and plumb lines and even more sophisticated coordinate measurement machines (CMM) are unable to provide the flexibility and accuracy of Faro Measurement Arms and CAM2 software. As of June 2006, the company had 4,900 customers worldwide with no single one accounting for more than 2.5% of sales. The company's problems appear to be behind it, and a resumption of profit growth is in the offing. While the Street was frustrated by its profit warnings and the ongoing patent dispute with Hexagon, I was actually rather impressed with management's candor about both issues. Management made a decision to spend more upfront to build market share at the expense of near-term profitability. Management also has repeatedly issued timely responses to patent claims introduced by Hexagon and implemented workarounds to prevent infringement. The company believes its products do not infringe and that the patent is invalid.
I believe Faro has great technology and strong growth prospects. Since 2001, the company has increased revenues from $35 million to 2006 estimates of close to $150 million. The company's filings with the SEC are now in order and growth is continuing. Estimates for 2007 are for 16% revenue growth and over 100% earnings growth to 91 cents. That gives the company a PEG of 1, with a clean balance sheet. I expect the shares to work back to the $30s over the next 24 months. Shares of Merge Technology imploded recently on a series of negative earnings announcements and a management shake-up over some creative revenue recognition practices. The reason I'm drawn to the shares at these reduced prices is the company's strong balance sheet and market-leading technology. The company has $60 million in cash and no debt, and the prospects remain attractive for its products. Merge offers a comprehensive end-to-end solution for the digitization, management and analysis of a variety of imaging technologies across the work environment. Merge sells filmless medical imaging workstations the company claims are the most widely used in the industry. It is an industry that is growing at a 15% to 20% rate per year and has only 25% market penetration. Merge is the only technology platform spanning RIS, PACS, and advanced visualization and clinical applications. Advanced CT and MRI technology will continue to drive demand for efilm workstations. There is risk to investing in Merge, but potentially great reward. The company's installed user base of more than 50,000 diagnostic workstations is testament to the technology and to a strong customer base. The Nasdaq has allowed the company until Aug. 29 to get its filings in order, and cash on hand certainly puts a bit of a floor in the stock. The company has indicated that restatements it is preparing are related to revenue recognition and are not cash adjustments.
According to Yahoo! Finance, over the past seven days, 2006 EPS estimates have increased from $1.30 to $1.35. If we compare the company to Emageon ( EMAG), another company I own, and apply a 2.5 times revenue multiple, Merge could be worth $350 million, or roughly $10 a share plus cash of almost $2 a share in the next 12 months. If growth resumes, the company could one day see its old highs in the $30s. If you believe this company will survive, there also appears to be an arbitrage possibility between the Canadian (MRG:TSE) and U.S.-listed shares. The Canadian shares were issued in conjunction with Merge's merger with the Canadian company Cedara to avoid tax issues for owners of Cedara. These shares are potentially exchangeable one for one for the Nasdaq-listed shares once the financials are reconciled, but the currency spread is often not reflected in the stock price, although the Canadian listing is super thin. Turning to the oft-discussed and super-frustrating Tier Tech, I'm back in as of last week at roughly $5.50. The stock is just too cheap, and the positives for the company remain relatively intact. It still has more than $60 million in cash and just over a $100 million market cap. It's profitable and earnings are expected to grow. I believe if management gets back to focusing on growing, and the business prospects remain strong, the company is easily worth $10. All scandal stocks represent risk, especially because even if things improve, it's difficult to regain investors trust. One thing that can't be denied is cash and technology, and all three of these companies are strong in those departments and the shares are heavily discounted. I believe the risk-reward ratio favors reward, so I'm a buyer of all three.