Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Clearfield, Inc. (CLFD 0.66%) are trading 21% lower today after the company reported disappointing results for its fiscal second quarter.
So what: Clearfield's top and bottom lines were both beneath Wall Street's expectations for the March quarter. The communications and connectivity services specialist posted revenue of $13.2 million -- a 26% year-over-year improvement -- and earnings of $0.09 per share. Analysts had expected $15.9 million in revenue and $0.12 in EPS. Both numbers were huge improvements, as the company's overall net income of $1.2 million represented a year-over-year gain of 125% -- margins have exploded thanks to Clearfield's ability to hold operating expenses to a modest 17% year-over-year growth rate.
Now what: Clearfield's gains were driven by a huge boost in international sales, which were 250% higher, and accounted for 17% of the quarter's total revenue, primarily due to deliveries to several Caribbean and Latin American nations. American sales were up a respectable but far more modest 11% year-over-year.
However, Clearfield's backlog is now 45% lower than it was just one quarter ago, and also 41% lower than it was a year ago. This could be a source of concern for investors who had bid shares up over 200% in the past year, and nearly 2,000% in the past five years, on hopes for strong growth that has thus far not matched the growth of the company's shares. Prior to this report, Clearfield's revenue had grown 130%, and its EPS 225%, over the past five years, which is far lower than share growth -- in the past year, Clearfield's share-price growth has risen almost entirely on the back of gains in its P/E ratio rather than on EPS improvements.
Today's pullback was probably the inevitable result of a momentum stock failing to live up to expectations. That doesn't make Clearfield, which now sports a P/E of 35, a bad investment, but investors must be careful not to hitch their portfolios to a valuation-driven growth engine that's about to break down. Keep your eye on this company, which seems to be making the right moves, but don't get worked up about buying opportunities right away.
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