(By Rich Bieglmeier) Earlier today we highlighted our favorite and not so favorite sectors. iStock picks a company following our sector analysis that we believe offers investors the winning trifecta of a bullish sector, reasonable valuations, and on-the-move technical characteristics.
Super Micro Computer, Inc. (SMCI) fits the description and is guilty on three all accounts. SMCI is a global leader in high-performance, high-efficiency server technology innovation is a premier provider of end-to-end green computing solutions for Enterprise IT, Datacenter, Cloud Computing, HPC and Embedded Systems worldwide.
Super Micro hits our emerging and mature bull sectors at the same time, technology and tech hardware, respectively. The NASDAQ traded tech company hit the skids in mid-July when they announced "steep HDD price declines during the quarter and higher expenses for R&D related to new product optimization and for market promotion impacted our net profit significantly in the short term."
Shares dropped from a July 18th close of $14.20 to a low close of $11.73 on August 14th. The stock price has since recovered some lost ground and appears to be on a collision course with its descending 50-day moving average. In the short-term, iStock wouldn't be surprised to see the two meet in the neighborhood of $13. Once shares can get the better of $13.60ish, SMCI should challenge the mid-$14s. On the downside, we would be uncomfortable if the networking & communication devices company closed below its intraday low of $11.64.
For the recently announced fourth quarter, Super announced sales that were up 14.9% from the third quarter and 6% year-over-year. However, net income shrank 22.1% from the third quarter and shriveled 48.7% from the same quarter of last year.
The disconnect between a growing topline and bottom-line is a result of margins getting smacked down by a big price drop of some key components and in particular hard drives as well as higher expenses for R&D and promotions related to new product introductions.
Management believes they are better positioned heading into 2013, noting "as we enter fiscal 2013 we are much better positioned for growth than ever, although we remain concerned regarding the overall economic environment." For the first quarter of fiscal 2013, the Company expects net sales of $270 million to $290 million and non-GAAP earnings per diluted share of approximately $0.18 to $0.24, essentially flat year-over-year (YOY).
While management feels good about the year ahead, iStock has some concerns that could last a quarter or two. We see a 20% increase in accounts receivables and a BIG 43.5% jump in YOY inventories. Hopefully, some of the spike is attributable to a buildup in new product offerings. If it's the remains of hard drives and key components that suffered "big price drops," then more disappointing preannouncements and underwhelming profits could be forthcoming.
Contracting margins led to contracting valuations for Super Micro Computer. The company trades with a trailing 12 month P/E of 18.75, which is slightly lower than the industry norm of 19.59. For the year ahead, analysts project earnings growth in the area of 20%. Meanwhile, SMCI's forward P/E of 10.13 is roughly half the projected eps growth.
iStock sees value in the smallcap tech company based on its discounted forward P/E, which is reflected in a PEG Ratio of 0.84. Remember, the lower the better for PEG ratios and, generally, anything less than 1 tends to outperform in the years ahead. The industry PEG is a smidge higher at .97.
The largest discount we see relative to its peer group is Super's price-to-sales ratio of 0.51, while the group norm is 1.38.
iStock believes Super Micro Computer, Inc. (SMCI) can close the value gap on its competition provided the company resolves the bloated inventories question when they report first quarter earnings in late October. If margins increase to historical levels, the stock price should follow.