By Barry Randall The fourth quarter earnings season, which used to last from mid-January to, say, Groundhog Day, now stretches interminably into late February and even early March. Credit or blame can be allocated equally to former Senator Paul Sarbanes and former Representative Mike Oxley, whose eponymous legislation passed in 2002.
Sarb-Ox"Sarbanes-Oxley" made going public and staying there an even more expensive and time-consuming proposition than it already was. More "I"s to dot and more "T"s to cross, I guess. But a silver-lining of "Sarb-Ox" is the earnings conference call. Yes, public companies have held conference calls for many years. But thanks to Sarbanes-Oxley (and the rise of the webcast) virtually every public company's earnings call was now available for your listening pleasure - or your reading pleasure, owing to transcription. This is especially valuable to money managers like me, who specialize in smaller capitalization companies. Sure, the entire participant roster of some of these conference calls could fit into a Tesla Model S, but it's a big improvement from the bad old days of 'selective disclosure.' And so here we are in mid-March. Practically every public company has now reported its December quarter and their analysts have raised or lowered 2015 earnings estimates. Portfolio managers have culled their portfolios, added new positions to replace the dearly departed and even raised their allocations to our favorite names.
My TrioHere are three that look promising at this time. Rogers Corp. (ROG) ; Market Cap: $1.4 billion; 2014 revenue: $610 million) Rogers is a Connecticut-based maker of printed circuit boards, specialty materials and high-power electronics. On the face of it, Rogers wouldn't seem to be on the leading edge of technology. But the nearly 200-year-old company is getting a lift from several major trends, including the voracious appetite for wireless infrastructure and the popularity of hybrid electric vehicles.
Only, instead of needing a brand new product line-up every three months like your typical mobile handset maker, Rogers can work with longer product cycles and still deliver high-technology solutions.How high-tech? Well, instead of putting the Rogers' technical 'chops' in terms of "nano"-this or "giga"-that, consider its fourth quarter gross profit margins were 39.5%, a nice mark-up and a lot closer to white hot players like NXP Semiconductor (45%) than to even blue-chip contract manufacturers like Jabil Circuit (6%).
R&D MuscleHigh gross margins are a measure of product quality and scarcity and reflect well on the 4% of revenues that Rogers is spending on R&D. Oh, and Rogers' Q4 gross margins were over two full percentage points higher than in its year-earlier quarter. What else was good about Q4? Non-GAAP earnings of $0.89, which was not only well ahead of the $0.72 consensus, but also ahead of the company's own $0.64 – $0.76 guidance. And its outlook for the current year was sufficiently positive that Street earnings estimates for 2015 have gone from $3.50/share to $3.77 in the last month.
Double-Digit GrowthESCO Technologies Inc. (ESE) ; Market Cap: $1.1 billion; 2014 revenue: $527 million) ESCO is an industrial technology supplier. Based in St. Louis, the company offers highly engineered products in fluid filtration, electromagnetic shielding and utility-scale test and measurement. Overall business can be choppy at times for ESCO and sales in its December quarter actually declined about 3% from the same period a year earlier. But the company's book-to-bill ratio exiting December was a whopping 1.26, reflecting a re-acceleration of business. Moreover, on its conference call, management reiterated confidence in achieving 10% revenue growth for the full year of 2015.
Cash FlowAnd, in my opinion, EPS growth seems likely to be as good or better, with stock buybacks and opportunistic M&A, both driven by solid cash flow.
After ESCO reported on February 9, its stock fell slightly. Perhaps that was a reaction to its March quarter guidance that was a bit below some aggressive analyst expectations.What I see is a good operator trading at a reasonable valuation (less than 2x sales) whose business is accelerating hard.
Tech SpecialistCascade Microtech Inc. (CSCD) ; Market Cap: $200 million; 2014 Revenue: $136 million) Beaverton Oregon-based Cascade develops and sells equipment used by semiconductor makers to test their products while still in wafer form - just after manufacturing but before packaging. Cascade makes the test machines themselves, plus consumable products used during testing, and provides various installation, training and maintenance services. In its December quarter, Cascade reported Non-GAAP earnings per share of $0.26, well ahead of the $0.18 analyst consensus. Revenue in the quarter was $36.6 million, a record for the company and in-line with its previous guidance. Fourth quarter gross margin of 53.4% was near an all-time high and bookings were a record, leading to a 1.27 book:bill ratio. On its earnings conference call, it provided conservative guidance for its March quarter, owing simply to normal seasonal patterns. This has caused the share price to retreat, making it even easier to buy shares of a very solid technology supplier.
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The investments discussed are held in client accounts as of March 12, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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