In times like these, forget the market, and concentrate on fundamentals. That should be the lesson from the action -- or lack thereof -- yesterday in FARO Technologies (NASDAQ:FARO). Shares in the maker of computerized measuring and manufacturing tools barely moved, despite the fact that the firm's second-quarter earnings were nothing short of stunning.
Lower-than-expected taxes and better gross margins fueled a 142% increase in earnings per share, to $0.29 per stub. That was 32% better than the highest guesses among analysts. Revenues were up 50% to $24 million, but that was old news.
The big earning surprise was the result of several factors. Taxes came in much lower than the 20-25% forecast by management. Gross margins improved 1.3%, and SG&A (selling, general, and administrative expenses) dropped an incredible 5% as a portion of revenues. Those savings are particularly impressive in light of the big recent ramp-up in staff. Last quarter, management had warned that this expansion -- necessary to pave the way for increased sales in the fast-growing European and Asian markets -- might take a toll on margins in the short term. Clearly, FARO's controlling costs very effectively.
To make things even better, the firm boosted its earnings outlook from $0.71-$0.86 per diluted share to $0.85-$1.00. And investors yawned, leaving the stock alone. That would represent earnings growth of 75% (straining out last year's bonus from a litigation settlement). And the firm still hasn't reached the fabled "hockey stick" growth rate, when its products become the rule, rather than the exception, in the industry. In the meantime, management announced plans to explore new markets, such as systems to reduce time and waste in the installation of pricey kitchen countertops.
Yet, investors yawned, leaving the shares trading at a trailing P/E of 24. Is there something wrong with that picture? How often do you see 75% earnings growth from an industry leader, available for that price?
Performance and potential are why Tom Gardner has tapped FARO twice as a Hidden Gems pick. The simple business and straightforward management make it an ideal stock for the lazy investor. But it's not for the faint of heart. Volatile as always, FARO will surely cause headaches for short-term thinkers. But those who buy and hold should be very pleased with what they continue to see. The market can't ignore this beauty forever.
Interested in finding great small companies that the Street is ignoring? Grab a shovel and join the diggers at Hidden Gems .
Fool contributor Seth Jayson is happy to own shares of FARO, despite the roller coaster ride. View his Fool profile here.
