What happened

Shares of CPI Card Group (PMTS 6.16%), the tiny company that probably manufactured half the retail credit cards in your wallet today, jumped 21.5% through 11:45 a.m. ET Tuesday morning after crushing analyst targets for second-quarter earnings.

Which is not to say those estimates had a lot of structural integrity to begin with.

So what

Heading into Q2, analysts had forecast a steep 37% decline in net income for CPI, from $0.52 per share a year ago, to just $0.33 in Q2 2023, as profits suffered from a 9% slump in sales. But here's the thing:  The sales slump didn't happen.  

Instead of reporting the $103.5 million in revenue that Wall Street had forecast for this under-covered stock, CPI turned in sales of $115 million for the quarter -- not a lot, admittedly, but up about 1% year over year. That 1% bump in sales, meanwhile, when combined with lower spending on selling, general, and administrative expenses, allowed CPI to expand its operating profit margin by 2 full percentage points to 15.2%, resulting in earnings growing 6% to $0.55 per share.

Again, not a lot -- but a heck of a lot better than a 37% decline.

Now what

The question now is whether CPI can keep the growth going in a market that just saw 10 U.S. banks downgraded by Moody's on liquidity concerns.  

In this regard, CPI management struck a cautious note. While CEO Scott Scheirman said he was "pleased with our team's ability to offset customer demand softness in parts of the market and challenging comparisons with last year's second quarter," he nonetheless ratcheted back sales growth expectations to flat to low-single-digit growth at year-end. On the plus side, though, he maintained CPI's prediction that adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will bounce back from a third-quarter decline to grow again in the fourth quarter, ending the year with mid- to high-single-digit growth. Even better, he reiterated management's promise to more than double free cash flow in comparison to last year.

At a minimum, this implies $27 million in free cash flow this year, which values the stock at about 12x FCF after today's run-up. Not a bad price, if CPI can manage to continue the neat trick of growing in an environment that seems increasingly hostile to bank profits.