CLFD Stock Study (9-8-23)

Posted by Mark on December 4, 2023 at 06:57 | Last modified: September 13, 2023 16:09

I recently did a stock study on Clearfield Inc. (CLFD) with a closing price of $33.39. The previous study is here.

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 past decade, this small-size company has grown sales and earnings at annualized rates of 15.2% and 20.2%, respectively. PTPM leads peer averages but lags the industry by dropping from 14.1% in ’13 to 7.6% in ’17 before trending higher in ’20-’22 to 23.6%. The last-5-year mean is 13.2%.

Also over the past decade, ROE leads peer and industry averages while tracing a similar asymmetric-U pattern ranging from 6.0% in ’17 to 35.9% in ’22 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.

With regard to visual inspection, lines are exponential, jagged, and narrowing including a sales dip in ’17 and declining EPS in ’15 and ’17. One thing I don’t like is ’16 EPS not being eclipsed until ’21. ’16 EPS is up 73.5% YOY so this could be due to a nonrecurring anomaly [I should check the 10-K]. Even with that excluded, ’14 EPS is not eclipsed until ’20. I question whether we see consistent historical growth despite a nice annual growth rate.

If the visual inspection fails, then the stock could still be a candidate for a speculative position. Keeping this in mind, I will continue the analysis.

Interest Coverage and Quick Ratio are a laudable 71 and 5.3, respectively, and Value Line rates the company B+ for Financial Strength. I’m surprised the rating isn’t higher.

With regard to sales growth:

• CNN Business projects contraction of 1.7% YOY and 0.5% per year for ’23 and ’22-’24 (based on 4 analysts).
• YF projects YOY contraction of 1.0% and 13.3% for ’23 and ’24, respectively (5 analysts).
• Zacks projects YOY contraction of 0.7% and 18.5% for ’23 and ’24, respectively (2).
• Value Line projects 15.2% annualized growth from ’22-’27.
• CFRA projects contraction of 1.0% YOY and 7.3% per year for ’23 and ’22-’24, respectively (5).
• M* provides 2-year annualized ACE of 9.2% contraction per year.

I am (arbitrarily) taking a 67% haircut from the one [Value Line] long-term estimate to get my forecast of 5.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 46.8% YOY and 31.4% per year for ’23 and ’22-’24, respectively (based on 4 analysts), along with a 5-year annualized growth of 6.0%.
• MarketWatch projects annualized 39.2% contraction and 31.4% growth for ’22-’24 and ’22-’25, respectively (5 analysts).
• Nasdaq.com projects 53.8% YOY contraction for ’24 (2).
• YF projects YOY contraction of 41.1% and 43.5% for ’23 and ’24, respectively (5).
• Zacks projects YOY contraction of 41.4% and 53.9% for ’23 and ’24, respectively (2).
• Value Line projects 3.3% annualized contraction from ’22-’27.
• CFRA projects contraction of 37.7% YOY and 44.6% per year for ’23 and ’22-’24, respectively (2).

Two long-term estimates are not much to go on. Value Line is a bit shocking being negative in the face of solid projected sales growth. I am forecasting above the long-term-estimate mean (1.3%) at 2.0%. However, given the bearish short- and long-term outlook, I will use the ’21 EPS of $1.47 (vs. $3.55 for ’22) as the initial value to get a high EPS of $1.62/share.

One other number I find shocking is MarketWatch’s ’22-’25 projection of 31.4%. This comes out of nowhere (’22-’24 is quite negative) and suggests substantial recovery in ’25. The high/low/average values all being equal for this estimate suggest one analyst for that $7.24/share. This is a 260% YOY increase from the ’24 high estimate [and an even greater percentage change from the ’24 average or low estimate]. I wonder what that analyst thinks will happen for CLFD in 2025?

My Forecast High P/E is 30.0. Over the past 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 10.2. It’s hard to wrap my head around these big numerical differences. 10.2 seems way too low, but 42.0 seems way too high. I am forecasting below the entire range and just below the 5-year-mean average P/E.

My Forecast Low P/E is 16.0. Over the past decade, low P/E has ranged from 11.1 (’13) to 40.4 (’17) with a last-5-year mean of 19.7. The last-10-year median is 22.2. I am forecasting toward the lower end of the range [’13, ’22 (12.4), ’21 (13.4), and ’20 (15.7) are lower].

My Low Stock Price Forecast (LSPF) of $23.50 is default based on $1.47/share initial value. This is 29.6% less than the previous close and 21.7% less than the 52-week low.

These inputs land CLFD in the HOLD zone with a U/D ratio of 1.7. Total Annualized Return (TAR) is 8.2%.

PAR (using Forecast Average—not High—P/E) is 2.6%, which is less than the current yield on T-bills. 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 167 studies (my study and 56 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 12.8%, 10.0%, 26.4, and 12.4, respectively. With a mean of 23.0, my P/E range is higher than Value Line’s projected average annual P/E of 20.0, which in turn is higher than MS (19.4). No MOS to see here.

MS high / low EPS are $5.69 / $3.59 vs. my $1.62 / $1.47 (per share). This is where my study gains huge MOS points. Even Value Line, which projects negative long-term growth, has a higher estimate ($3.00/share).

MS LSPF of $30.40 implies a Forecast Low P/E of 8.5, which is lower than the above-stated 12.4. MS LSPF is 31.7% less than the default $3.59/share * 12.4 = $44.52 [invalid on today’s date], which results in more conservative zoning [that needs to be lowered even further]. MS LSPF is 29.4% greater than mine.

My TAR (over 15.0% preferred) is much less than the 30.0% from MS.

MOS backing the current study is robust.

With regard to valuation metrics, PEG is not available due to an effectively negative growth rate in my study and no 5-year forecast provided by Zacks. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap at 0.33.

CLFD is a BUY under $29/share. With a forecast high price of $48.70, my TAR criterion should be met closer to $24.35 until/unless something convinces me a more bullish EPS outlook is warranted.