Should You Get Out of Oplink Communications Before Next Quarter?

There's no foolproof way to know the future for Oplink Communications (Nasdaq: OPLK  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

A cloudy crystal ball
I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR (the amount of money owed the company) and DSO (days' worth of sales owed to the company) don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, if AR grows more quickly than revenue or DSO balloons, that can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Or it can indicate that the company sprinted to book a load of sales at the end of the quarter, the way used-car dealers do on the 29th of the month. Sometimes, companies do both.

Why might an upstanding company such as Oplink Communications do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Oplink Communications sending any potential warning signs? Take a look at the following chart, which plots revenue growth against AR growth, and DSO:

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.

Company

LFQ Revenue

DSO

Oplink Communications $52 65
Finisar (Nasdaq: FNSR  ) $263 60
JDS Uniphase (Nasdaq: JDSU  ) $474 61
Harmonic (Nasdaq: HLIT  ) $138 64

Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of last fully reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.

Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will Oplink Communications miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Oplink's year-over-year revenue grew by 58.9%, and its AR grew by 57.0%. That looks OK. End-of-quarter DSO decreased by 1.2% from the prior-year quarter and rose by 11.2% versus the most recent quarter. That demands a good explanation. Still, I'm no fortune-teller, and these are just numbers. Investors who put their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt for the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends to sell them short and profit when they eventually fall. Which way would you play this one? Let us know in the comments section below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings. He is a co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 05, 2011, at 4:23 AM, CSIHawaii wrote:

    The author's headline "Should You Get Out of Oplink Communications Before Next Quarter?" sets a fear-mongering stage.

    The author states "Alone, AR (the amount of money owed the company) and DSO (days' worth of sales owed to the company) don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future." The author then tells you there is a trend. He misleads because all he has is one quarter's numbers and that cannot be described as a trend. Most analysts would take this to be normal lumpiness.

    The author makes reference to desperate company tactics and used-car dealers. And then the author states "Why might an upstanding company such as Oplink Communications do this?" Clearly, a knife in Oplink's back, disguised as a complement.

    The author states "Is Oplink Communications sending any potential warning signs?" as an introduction to the misleading chart. Oplink in doing nothing more than business as usual.

    The author implies there is something alarming about AR growth approaching revenue growth. It would be very reasonable for AR growth to equal revenue growth. No company is monitoring this relationship to maintain it constant, so it naturally deviates quarter to quarter. If we look at the author's chart we see that AR growth is sometimes higher and sometimes lower. We also can see that when it was higher on FQ3/2010, Oplink still beat analysts expectation, even if it was only by 4%.

    This article has no merits, unless it was intended as a stealth short hit.

    Motley Fool badly need to find authors who focus more on facts than innuendo.

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