Stock Screen: As the inventory turns
By Lisa Meyer
Red Herring
April 26, 2001
Cisco Systems's (Nasdaq: CSCO) recent news that it would write off $2.5 billion in inventory brought home the fact that companies across various subsectors of the technology industry are weighted down by too much stuff. Many analysts agree that companies with huge inventory backlogs will need to diminish them in order for their fundamentals (and of course stock prices) to improve. Fortunately, not all technology companies are faced with inventory gluts.
To find those that aren't, we decided to focus this week's stock screen on a measure known as inventory turnover. Using the Thomson Financial/Baseline database, we searched for telecommunications and technology companies. First, we required that a company have an inventory turnover ratio greater than 10. Inventory turnover is calculated by dividing a company's current inventory by its trailing 12-month sales. So a company with an inventory turnover ratio of 10 would in theory be able to turn over its current inventory at least 10 times in a 12-month period. The higher the turnover rate, the better a company is at managing its inventory.
We also wanted to find companies that aren't stockpiling inventory in these uncertain times. So we made sure that the firms on our list had sequential revenue increases that, on a percentage basis, were higher than the increase in inventory. Of course, companies that had decreased their inventory made the cut. We also demanded that a company's sales in the latest quarter be higher than the previous quarter. To further whittle down the selection, we wanted companies that are expected to post earnings increases of at least 10 percent this year. Adding a valuation metric, we requested a price-to-earnings ratio of less than 36 times estimated 2001 earnings. Finally, for this screen, market capitalization had to be at least $500 million. Data used was current as of April 24.
WHO MADE THE CUT?
The result was 11 companies: Affiliated Computer Services (NYSE: ACS), Alpha Industries (Nasdaq: AHAA), Activision (Nasdaq: ATVI), Black Box (Nasdaq: BBOX), Cabot Microelectronics (Nasdaq: CCMP), Cree (Nasdaq: CREE), Citrix Systems (Nasdaq: CTXS), C-Cube Microsystems (Nasdaq: CUBE), DDI (Nasdaq: DDIC), DuPont Photomasks (Nasdaq: DPMI), and Linear Technology (Nasdaq: LLTC).
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