I save the Motley Fool's article on Orbit here in case it may get deleted later in the future from the Fool. Also, please check out Orbit's web site, it's quite impressive:
orbitfr.com
From Yahoo, the earnings estimate is now bumped up to $0.69 this year and $0.98 for next year. Last quarter, Orbit made $0.20 earnings, so I think the company should be able to blow these estimates easily if they continue the growth path:
quote.yahoo.com
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Motley Fool's article on 8/1/97
In an attempt to elucidate this important point, I thought it might be useful to take readers through a preliminary examination of a company that caught my eye today, ORBIT FR (Nasdaq:ORFR) . Orbit rose $2 5/8 to $14 1/4 today after the company reported quarterly earnings of $0.20 per share, four cents above the estimate from the lone analyst who tracks the company on a quarterly basis according to First Call. Glancing at the company's press release this morning to decide whether or not it might make fodder for the Lunchtime News column, I noticed that the company had increased revenues by 194% and profits by a whopping 20,000% by looking at the "Consolidated Statements of Operations."
When a small, recently public company can report impressive earnings growth on very strong sales growth, I normally make a mental note of the company and go back to check on it later. After writing my Lunchtime News column on the interesting earnings growth posted by cereal vendor Kellogg Co., I went back to Orbit's financials to look at them a little bit closer. A quick assessment of operating margins showed that Orbit had increased them to 24.3% from 4.3% the year earlier. Operating margins, the percentage of money a company gets to keep after paying all manufacturing and operating expenses, is an excellent guide to the underlying profitability of the business without being obscured by interest income, interest expense, tax expense, or contributions to net income from "other" sources. With a 24.3% operating margin on only $5.3 million in revenues, Orbit struck me as a very profitable business.
Orbit gained most of its operating margin increase by only growing "General & Administrative" and "Sales & Marketing" expenses by about 45% year over year, although "Research & Development" also grew much slower than revenues, and gross margins increased a few percent. A newly public company controlling operating expenses to the point where it is already surprising the analysts who helped to bring the company public is always very interesting. It was time to figure out what the heck Orbit FR did and whether or not there was any reasonable way that I could learn enough about its business to understand what was happening at the company.
The blurb at the bottom of the press release stated that Orbit made microwave test and measurement equipment for a variety of applications, mainly telecommunications and satellite communications. Although helpful, this was not necessarily what I was looking for. Because I knew from the press release that Orbit only came public on August 1st, I knew that the company's S-1 filing would be available on EDGAR, giving me a wonderful opportunity to read all about the company courtesy of the underwriters. Although 10-Qs and 10-Ks are great and everything, there is nothing more comprehensive than an S-1 filing -- the filing a company makes before it comes public. The S-1 details the business in a way that is not required in the 10-Qs or 10-Ks, and therefore makes this little document a great source for information about the industry.
Because I prefer looking for SEC filings by ticker instead of company name, I normally use the www.edgar-onli ne.com or www.freeedgar.com websites. Dialing up Orbit's S-1 on one of these services, I began to eagerly read. In the "Business" section of the filing, I discovered that Orbit made automated microwave test and measurement systems both piecemeal and as turnkey solutions for prices between $50,000 and as much as $2.5 million. After this, there was a huge list of all the specific products the company made and how they worked. For instance, one system Orbit manufactures tests antennas for signal quality, direction, strength, and interference. Another system tests cellular/PCS/pager units, another cellular/PCS/pager base stations, another satellite systems, and so on.
The most important information about the company was not as much the details of its products but what its products specifically did and who was buying them. The company broke its business into four segments: wireless communications, satellite, automotive, and aerospace/defense. The customer names are pretty impressive, although it is difficult to assess how much a company with a sales run-rate of $20 million a year is really selling to these companies. The company listed its primary competitors as SCIENTIFIC ATLANTA (NYSE:SFA) , Nearfield Systems, AEROFLEX (AMEX:ARX) , System Planning Corp., and Rantec/ESCO. Given that two of its competitors are public, the next step after reading through the S-1 is to look at the filings of the competitors that are public to get a sense of how much they compete and what kind of revenues they generate. The goal of looking at the competitive landscape is to figure out the relative positions of all the companies and determine what that might mean for future growth.
Another overlooked information source about the company is its own website. Orbit has a particularly good one (www.orbitfr.com) where I discovered that Orbit has an agreement with Hewlett-Packard to serve as a channel partner for its antenna measurement systems. The listing of the company's international sales offices was also rather impressive for what I had originally taken to be a really small company. Another important piece of data offered on the website is the company's main phone number. By calling the company's Investor Relations office and asking some questions about what the company's market share in its business is and whether or not there are any industry trade organizations that track sales, I could find a whole new channel of information on the company.
While certainly none of this constitutes due diligence in my book, I do believe that an investor who takes the time to look at the company's information, the website, competitor information, industry group information, and who has chatted with Investor Relations can learn an awful lot about whether or not there is an opportunity in a company in a fairly short time. As Orbit earned $0.35 per share in the first half of the year and current estimates call for $0.65 per share in the full year, I would assume that the estimates are too low and work from there to gather the necessary information to come up with better numbers. Assuming something more like $0.80 per share for this year and $1.10 per share for next year, even at nearly double the IPO price of $8.25, Orbit could prove interesting. |
