A Tech-Sector Value
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Still, you can find cheap tech stocks on occasion; they're just not the ones garnering all the praise and hoopla. A current example is Sonar/GPS equipment specialist Lowrance Electronics (Nasdaq: LEIX). A couple of weeks ago, Lowrance reported second-quarter earnings that didn't exactly set the world ablaze. Sure, sales were up 33%, and net income was up 35%, but because of a secondary offering late in 2004, earnings per share grew by only 5%. That's disappointing, but the number of shares outstanding going into the quarter was not a secret. As a result, such a low EPS was not unexpected.
The company's financials still have enough red flags to worry investors. Gross margins have taken a hit on the income statement as the company expands into the lower-margin but rapidly growing consumer GPS market. And the balance sheet shows accounts receivable and inventory growth that's outpacing sales growth -- a cause for concern that we highlight often here at the Fool. To top it all off, the company sports $26.5 million in debt to go along with just $1.3 million in cash, and the cash it raised from the secondary offering in 2004 was spent paying down debt and buying out a lease on a factory and land in Mexico.
At first glance, Lowrance appears to be a mess, but I'm rather bullish on the company for a few reasons. My most important consideration is that at the company has a price-to-earnings ratio 10. With that kind of rate, all of the above problems are pretty well priced into the shares. I also note that Lowrance grew at a 33% clip in the second quarter, a growth that comes on the heels of profitable and accelerating sales growth of 26.7%, 11.1%, and 8.3% in 2004, 2003, and 2002, respectively.
I'm a little bit concerned about the accounts-receivable and inventory-growth numbers. They're the factors that keep me cautiously optimistic. But the second quarter marks the beginning of Lowrance's busiest time of the year, and the third quarter is historically its busiest, so a buildup in inventory to meet what should be growing demand is not unwarranted.
Lowrance does have formidable competition in Garmin (Nasdaq: GRMN) and Johnson Outdoors (Nasdaq: JOUT), but with its P/E of 10, a rapidly growing industry, and a CEO that owns just over 10% of the shares, Lowrance is hard not to appreciate. I know I like its chances. |
