Summary
Clearfield Inc.'s financial performance, efficiency, and growth over the past few years indicate a potentially undervalued investment opportunity. The company has consistently demonstrated strong earnings growth and returns, distinguishing itself as a solid player in the communication equipment industry. Despite experiencing negative free cash flow in the last four fiscal quarters, Clearfield's cash reserve and short-term investments provide sufficient coverage for its current cash burn. In this article, we will provide a comprehensive analysis of Clearfield's financial performance, efficiency, valuation, and market position.
Introduction
CLFD has experienced a recent decline in its stock price, which prompts us to explore any potential opportunities for value investors. Before diving into the numbers, let's take a moment to understand the company's background and offerings:
Clearfield is a US-based company that manufactures, markets, and sells standard and custom passive connectivity products to fiber-to-the-premises, enterprises, and original equipment manufacturers markets. With a wide range of products and solutions, Clearfield serves incumbent local exchange carriers, competitive local exchange carriers, wireless operators, multiple systems operators, and cable TV companies, as well as the utility/municipality, enterprise, and data center markets.
Analysis
Valuation Insights
Based on its earnings relative to its share price (10.85x), CLFD is good value compared to the US market average (37.39x) and the US Communication Equipment industry average (16.47x). Furthermore, CLFD is also good value based on its book value relative to its share price (2.16x) when compared to the US Communication Equipment industry average (3.03x).
Graham valuation gives an intrinsic value of $146.15, which is significantly higher than the current price at $42.53. The PEG ratio, based on the earnings growth of the past 5 years, is 0.14, indicating that the stock might be undervalued considering its growth potential.
It is important to note that due to the negative cash flow experienced by Clearfield in the last four quarters, Discounted Cash Flow (DCF) modeling may not be an appropriate method to evaluate the company's intrinsic value. Nonetheless, the other valuation metrics mentioned above still indicate that the stock is potentially undervalued.
Financials And Performance
Clearfield has displayed consistent long-term earnings growth over the past 10 years (562.07%). The company's Return on Equity (30.3%) and Return on Assets (23.2%) are both higher than the US Communication Equipment industry averages, indicating a highly efficient company at generating returns. Moreover, CLFD has become more efficient at generating Return on Capital (22.57%) compared to three years ago (6.73%).
Despite the negative free cash flow in the last four quarters, CLFD's cash and short-term investments ($147.85M) can cover its cash burn for the next year ($7.17M), even accounting for increasing cash burn (135.71%). This provides a safety net for the company's financial health. Additionally, the company's currents assets ($160.12M) also greatly exceed its short-term liabilities ($51.69M), indicating a strong financial position.
Debt Growth and Cash Growth
Clearfield's debt has grown significantly by 1356.68%. Although this might seem alarming, it could be acceptable considering the high earnings growth, as the company is leveraging its resources to invest more in its growth. Notably, the company maintains a high equity ratio of 80.00%, which indicates that it still has a strong financial position despite the increase in debt. However, investors should monitor this development closely to ensure that the company maintains a healthy debt-to-equity ratio.
Growth and Market Position
Clearfield has demonstrated impressive growth in both net income and revenue over the past few years. The financial results demonstrate an astounding earnings growth between 2018 and 2022, with the most recent growth rate measured at 142.84%, Similarly, revenue growth (YoY) has also increased, with the latest rate at 92.45%.
In addition, CLFD has exceeded Yahoo Finance's projections for earnings the last four quarters, suggesting a robust performance.
In contrast, the company's cash growth has been negative, with a decrease of 4.82% in 2022 and 12.73% in 2021. This could be a cause for concern, as it may indicate that the company is facing challenges
Conclusion
Clearfield Inc. appears to be an undervalued stock with strong financial performance, efficiency, and growth potential. The company's consistent earnings growth, increasing efficiency, and impressive market position make it an attractive opportunity for value investors. The analysis also revealed that Clearfield's stock is undervalued based on its intrinsic value, PEG ratio, and other valuation metrics.
However, it is essential to consider the negative free cash flow in the last four quarters, which might be a cause for concern. Nonetheless, Clearfield's cash and short-term investments can cover its cash burn for the next year, providing some financial stability.