Wireless Facilities (NASDAQ:WFII) has seen rapid growth, strengthening fundamentals, and increasing visibility -- all good stuff. So why has the stock lost more than a third of its value since early January? It's a taxing question -- literally.
Wireless Facilities, which competes with the likes of LCC International (NASDAQ:LCCI) and American Tower (NYSE:AMT), designs and deploys wireless networks for telecom carriers such as AT&T Wireless (NYSE:AWE) and Sprint PCS (NYSE:PCS). On Feb. 19, the company reported rock-solid results for 2003. Revenue grew 40% year over year, earnings per share (EPS) went from a loss of $1.33 to a gain of $0.32, and, for the first time in three years, the company felt comfortable enough with underlying fundamentals to give forward guidance. Still, the stock dropped nearly 16% the following day, and is down a total of almost 30% since the earnings were released.
The likely culprit is the Street's 2004 EPS estimates, which were reduced by a penny or two due to a higher-than-anticipated "effective tax rate" for the coming year. Wireless Facilities gets about a quarter of its revenue from overseas contracts and thus pays a variety of percentages to international tax collectors. This year, the company expects their blended tax rate to be in the range of 15% to 17% range, versus forecasts of 5% to 7%. Bummer.
But should investors send a stock to the woodshed because of a higher effective tax rate? Not in my book. The effective tax rate is more about the location of projects in any given year than the fundamentals of the business itself. Has the underlying business weakened because more projects take place in countries with higher tax rates? Conversely, when the effective tax rate inevitably drops back down, will the underlying business have improved?
Personally, I'd rather focus on the demand drivers for Wireless Facilities' services (increasing), SG&A as a percentage of revenue (decreasing), revenue per employee (increasing), and balance sheet (pristine -- $114 million cash, no debt). Also, I like the look of Wireless Facilities' operating income. It grew from a loss of $55 million in '02 to a gain of $22 million in '03, and is expected to hit $39 million and $51 million in '04 and '05, respectively.
By the way, I'm not the only one who likes the company's prospects. Wireless Facilities' new CEO, Eric DeMarco, just purchased more than $615,000 worth of shares in the company.
"Effective tax rate" be damned. Wireless Facilities is strong and getting stronger.
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Motley Fool contributor Ted Rogers is a writer from Virginia. He owns options in Wireless Facilities, and holds shares in Sprint PCS and LCC International.
