A week ago, I saw Paul Stephens of Robertson Stephens on Wall Street Week. He runs that firm's Contrarian Fund and mentioned in the interview that he shorts stocks with deteriorating fundamentals. In particular, he said something to the effect that you can spot future disasters by watching a company's receivables and inventory.
This got me thinking about CSCC. The recent stock price decline was not triggered by a failure to meet its quarterly earnings projections but by an increase in the company's receivables (typically measured using the days sales outstanding ratio) and the slowing in the sequential growth in its frame relay business, which comprises about three quarters of the company's current sales.
I currently own a bunch of CSCC stock and it occurred to me that I hadn't done the financial analysis to see how bad these numbers are. I also got to wondering if Paul Stephens was right in the case of Shiva. That is whether you could see the Shiva disaster coming in the 3rd quarter days sales outstanding ratios of that company. My interest was not because I own Shiva but because I wondered if a comparison could be made (i.e., you could extrapolate) from Shiva's results to CSCC's future results.
With these questions in mind, I got out a spread sheet that I developed primarily to determine whether the price of a stock is cheap in comparison to other similar companies in an industry group.
The exercise is called comparative analysis and simply involves comparing certain of CSCC's financial ratios with those of similar companies. The companies selected for comparison include some rapidly growing data communications companies that sell primarily to the telecommunications market. They are:
o Ascend Communications (ASND)
o Cascade Communications (CSCC)
o Cisco Systems (CSCO)
o Network Appliance (NTAP)
o Shiva (SHVA)
The financial ratios selected are as follows:
o Price to sales
o Price to earnings
o Growth rates on sales
o Earnings margins on sales
o Days sales outstanding
o Days inventory outstanding
o R&D to sales
To determine whether CSCC's price is cheap, I calculated the price to sales and price to earnings ratios for each of the last four fiscal quarters based on the then trailing 12-month sales and earnings and the stock's lowest trading price/sh during each of those periods. I also calculated the price to sales and price to earnings ratios based on Friday's closing price for each stock. And finally, I performed a calculation for each of these companies based on Peter Lynch's suggestion that you purchase a stock when its forward price/earnings ratio is equal to or lower than its long-term expected earnings growth rate. The results are as follows:
Table 1
TRAILING 12 MONTH SALES PER SHARE
Qtr.
Ended ASND CSCC CSCO NTAP SHVA
Hist. Dec Dec July April Dec
Dec-96 4.91 4.07 8.35 5.06 6.75
Sep-96 3.86 3.31 7.31 4.32 6.33
Jun-96 2.83 2.61 6.33 3.62 5.41
Mar-96 1.98 2.00 5.42 2.93 4.57
Dec-95 1.35 1.61 4.63 2.24 3.97
Source: O'Neal Database and Company Press Releases
Table 2
QUARTERLY SALES GROWTH RATES
Qtr.
Ended ASND CSCC CSCO NTAP SHVA
Dec-96 189% 139% 73% 91% 32%
Sep-96 285% 162% 78% 144% 90%
Jun-96 332% 176% 84% 222% 95%
Mar-96 347% 138% 87% 215% 68%
Dec-95 333% 128% 78% 200% 67%
Table 3
QUARTERLY EPS
Qtr.
Ended ASND CSCC CSCO NTAP SHVA
Historical EPS
Dec-96 0.32 0.24 0.49 0.19 0.05
Sep-96 0.31 0.21 0.47 0.16 0.19
Jun-96 0.24 0.17 0.41 0.13 0.22
Mar-96 0.17 0.12 0.37 0.17 0.15
Dec-95 0.12 0.10 0.31 0.14 0.15
Sep-95 0.07 0.07 0.28 0.07 0.06
Jun-95 0.05 0.06 0.24 0.04 0.04
Mar-95 0.04 0.05 0.21 (0.16) 0.08
Source: O'Neal Database and Company Press Releases
Table 4
LOW PRICE PER SHARE DURING QUARTER ENDED
Qtr.
Ended ASND CSCC CSCO NTAP SHVA
Dec-96 58 55 58 28 35
Sep-96 38 46 45 20 42
Jun-96 48 40 44 26 42
Mar-96 29 21 32 23 25
Dec-95 17 14 30 20 21
Current Price
7-Mar 54 26 51 41 14
Table 5
RECEIVABLES
Qtr.
Ended ASND CSCC CSCO NTAP SHVA
Dec-96 103,145 81,949 1,024,942 12,336 39,904
Sep-96 89,529 50,273 752,643 10,866 49,088
Jun-96 66,024 50,906 622,859 6,751 36,260
Mar-96 41,634 30,766 529,687 5,330 26,524
Dec-95 31,238 19,910 491,223 4,249 22,982
Table 6
INVENTORY
Qtr.
Ended ASND CSCC CSCO NTAP SHVA
Dec-96 49,241 19,303 203,721 9,585 17,958
Sep-96 42,382 18,611 243,538 8,318 14,130
Jun-96 53,794 12,565 301,188 6,493 11,852
Mar-96 50,024 6,898 313,855 4,825 11,591
Dec-95 26,868 7,645 221,579 4,827 7,846
(CONTINUED IN NEXT POST) |
