CLFD Stock Study (6-9-23)

Posted by Mark on July 19, 2023 at 06:35 | Last modified: June 11, 2023 11:40

I recently did a stock study on Clearfield Inc. (CLFD) with a closing price of $44.62.

M* writes:

     > Clearfield Inc mainly designs, manufactures, and distributes
     > fiber protection, fiber management and fiber delivery solutions
     > for communications networks. It provides a range of products
     > including copper assemblies, cassettes, box enclosures, fiber
     > connectors, frames, microduct, terminals, vaults, pedestal
     > inserts, FieldSmart, WaveSmart, and CraftSmart. The company
     > has a global presence with the majority of the revenue derived
     > from the United States. The company has two reportable segments
     > namely Clearfield segment and Nestor cables segment. The
     > majority of revenue is derived from Clearfield segment.

Over the last 10 years, this small-size company has grown sales and earnings at annualized rates of 15.2% and 20.2%, respectively. Lines are exponential, jagged, and narrowing including a sales dip in ’17 and declining EPS in ’15 and ’17.

My 3/7/23 First Cut was not submitted as I was waited for a Value Line email response about suspect data.

In revisiting the numbers last night, the initial decision was to reject the stock outright. Maybe I’m wrong, though. I will force myself through this and highlight areas of doubt and curiosity.

My first challenge is the visual inspection. Lines are not up, straight, and parallel. EPS from 2013 increases, falls, and is finally eclipsed seven years later by EPS of $0.53/share. This (+55.9% YOY) is when the growth phase really appears to begin and it does so in exponential fashion. Sales growth appears more linear through ’20 before going exponential in ’21 and ’22.

Should ’21 and ’22 be excluded as outliers? Keep reading to see analyst estimates. If excluded, then the gaudy annualized growth rates reported above shrink to 8.1% for sales and 1.2% for earnings.

PTPM over the last decade drops from 14.1% in ’13 to 7.6% in ’17 before trending higher in ’20-’22 to 23.6%. This is above peer but below industry averages, and the last-5-year mean is 13.2%.

ROE traces a similar pattern ranging from 6.0% in ’17 to 35.9% in ’22. This has been higher than peer and industry averages with a last-5-year mean of 15.8%. Debt-to-Capital is zero until ’20 (3.3%), has a last-5-year mean of 5.1%, and is much lower than peer and industry averages. Interest Coverage and Quick Ratio are a laudable 105 and 4.9, respectively, and Value Line rates the company B+ for Financial Strength.

With regard to sales growth:

• CNN Business projects 1.7% YOY contraction and 0.8% growth per year for ’23 and ’22-’24 (based on 4 analysts).
• YF projects YOY 1.8% contraction and 3.4% growth for ’23 and ’24, respectively (5 analysts).
• Zacks projects YOY contraction of 1.4% and 7.7% for ’23 and ’24, respectively (2).
• Value Line projects 15.2% annualized growth from ’22-’27.
• CFRA projects 1.7% YOY contraction and 0.8% growth per year for ’23 and ’22-’24, respectively (5).
• M* provides 2-year ACE of 4.3% contraction per year.

Except for Value Line, most of these estimates have collapsed since my original study three months ago. Value Line’s latest sales estimate is annualized growth of 0.8% from ’22-’24 followed by 26.0% from ’24-’27. Is that reasonable?

Can Value Line can be trusted without confirmation from another long-term estimate. They do make a case in the text section for why the company is “well positioned to recover.” To believe in this one analyst, though, who has dramatically changed tune just one quarter later feels like a big ask.

I am [arbitrarily] taking a 50% haircut from Value Line to get my forecast of 7.0% per year. I will use ’22 annual EPS as my initial value given the short-term analyst projections of contraction despite growth in the first two quarters of ’23.

With regard to EPS growth:

• CNN Business projects contraction of 47.0% YOY and 29.8% per year for ’23 and ’22-’24, respectively (based on 4 analysts), along with a 5-year annualized growth of 6.0%.
• MarketWatch projects 25.9% contraction per year and 31.4% growth per year for ’22-’24 and ’22-’25 (5 analysts).
• Nasdaq.com projects 25.4% YOY contraction for ’24 (2).
• YF projects YOY contraction of 48.2% and 7.1% for ’23 and ’24, respectively (5).
• Zacks projects YOY contraction of 49.0% and 25.4% for ’23 and ’24, respectively (2).
• Value Line projects 3.3% annualized contraction from ’22-’27.
• CFRA projects contraction of 45.6% YOY and 36.1% per year for ’23 and ’22-’24, respectively (2).

The Value Line [long-term] estimate is shocking and a big reason I decided last night to pass on this study. Besides the long-term sales projection, many of Value Line’s other estimates have also collapsed. If I open both quarterly reports as .pdf files and mouse back and forth from one to the other, I can see the big changes in front of my very eyes: quite shocking! Among others, EPS growth from ’20-’22 to ’26-’28 decreases from 26.5% in the March report to 8.5% in June [interesting that CNN Business, the other long-term estimate, remains unchanged at 6.0%].

I can’t help but raise an eyebrow upon seeing Value Line’s strong long-term sales growth projection in the face of negative EPS growth—not to mention the analyst’s discussion of being “well positioned to recover.”

One sign of future recovery I do see is in MarketWatch’s ’22-’25 projection. This suggests substantial recovery in ’25. Despite “number of ratings: 5,” high/low/average values all being equal for the ’25 projection suggest just one analyst for that $7.24/share. This is a 260.2% YOY increase from the ’24 high estimate [even greater percent change from the ’24 average or low estimate]. I wonder what exactly is supposed to happen for CLFD in 2025?!

My 1.0% EPS forecast [was 6.0% in March] is just below the average of both long-term estimates (1.3%). Given the near-term negative estimates, I will use the ’22 annual EPS ($3.55) rather than Q2 ’23 ($3.81 annualized) as the initial value.

My Forecast High P/E is 27.0. Over the last decade, high P/E has ranged from 31.9 (’21) to 77.1 (’17) with a last-5-year mean of 42.0. The last-5-year-mean average P/E is 30.9, but the current P/E is 11.8. From a valuation perspective, the stock appears to be in the midst of a crash. Can we explain it mathematically? ’22 EPS is 401% greater than the highest EPS seen in the first 8 years of the 10-year window. That huge number is going to put downward pressure on P/E. While this is somewhat offset by a higher stock price, the latter overlaps with ’21 stock prices when EPS was 61% lower [than Q2 2023].

It’s hard to wrap my head around these big numerical differences. 11.8 seems way too low, but 42.0 seems way too high. Splitting the difference undercuts the last-5-year-mean average P/E. I am [arbitrarily] selecting that as my forecast.

My Forecast Low P/E is 7.0. Over the last decade, low P/E has ranged from 11.1 (’13) to 40.4 (’17) with a last-5-year mean of 19.7. I am forecasting conservatively below the entire range.

My Low Stock Price Forecast (LSPF) is $24.80. This assumes zero growth from ’22 EPS. The short-term projections are unanimously negative and I could decrease low EPS for that reason [thanks to Carol Theine of the Puget Sound Chapter for this discussion]. I will stick with my existing method. If EPS falls in subsequent quarters, then low EPS will decrease by default. In the meantime, my LSPF is 44.4% less than the previous closing price and 17.3% less than the 52-week low.

These inputs land CLFD in the HOLD zone with a U/D ratio of 2.8. Total Annualized Return (TAR) is 17.5%.

PAR (using Forecast Average—not High—P/E) is 7.1%, which is lower than I like to see for a small-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 316 studies over the past 90 days (my study along with 100 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 15.0%, 12.0%, 26.8, and 13.0, respectively. I am lower across the board.

Value Line projects a future average annual P/E of 20.0. This is higher than MS (19.9) and mine (17.0). This is also higher than the 15.0 displayed in the previous Value Line report. When I emailed in March, I wrote:

     > What catches my eye is the ’26-’28 Avg Annual P/E Ratio of 15,
     > which is well below anything in the last decade. Your lowest
     > number in the last 10 years is 19.7 in ’22, but Morningstar
     > shows this to be 24.5. Your 22.6 from ’21 matches their 22.65…
     > I just wanted to confirm the 15 because it’s so much lower than
     > anything coming before it in the statistical array.

I got no response, but I’m glad to see something more reasonable now [as I write with current P/E ~11. Oh the irony!].

MS high (low) EPS are $6.74 ($3.76) compared to my $3.73 ($3.55). My high EPS is lower due to a lower EPS growth rate.

Overall, MOS in the current study seems robust.

MS LSPF of $30.40 is 22.6% greater than mine. It implies an MS low P/E of 8.1 in contrast to the above-stated 13.0 and is 37.8% less than the $3.76 * 13.0 = $48.88 default value [which would be INVALID today]. I do like that the disconnect biases toward lower-risk by stretching the BUY zone down.

Value Line gave me a big headache by projecting negative future growth and talking bullishly about recovery. In the end, they write: “the risk and reward scenario doesn’t look overly attractive even at these depressed price levels.” Surprisingly to this junior analyst [especially with the stock up $6 since the report date], I don’t think it’s all that far away!

CLFD is a BUY under $43/share.