Question: When is 20% earnings growth, and 34% revenue growth, bad news?
Answer: When the earnings growth is exactly as we expected, the revenues are less than expected, and -- unfortunately -- the company reporting the news is Motley Fool Rule Breakers recommendation Polycom (Nasdaq: PLCM).
Polycom reported on its first-quarter 2008 numbers yesterday with the results mentioned above. Sales increased to $258.9 million for the quarter, and Polycom predicts further growth is forthcoming as the company expands its "strategic partnerships such as Microsoft (Nasdaq: MSFT), Nortel (NYSE: NT), Avaya, IBM (NYSE: IBM), and others." Which others? Well, we know Polycom also cooperates with heavy hitters Cisco (Nasdaq: CSCO) and Alcatel-Lucent. Meanwhile, pro forma profits came in at $0.36 per share.
Pro forma?
Yeah, I know. Ever since The Bubble, companies speaking Latin give me the willies, too. So let's look at some numbers with more substance to them:
- Depending on how you look at it, real profits -- the GAAP kind -- did either much better or much worse. At $0.16 per share, they don't look as impressive as the pro forma numbers -- but compared to last year's $0.11 in Q1 earnings they grew 45%.
- More substantial still was Polycom's free cash flow for the quarter, which skyrocketed 148% to a cool $27 million.
For my money, that's the number to focus on -- the 27 mil. Tack it onto the $108.6 million that Polycom earned over the last three quarters of fiscal 2007, and this company has raked in $135.6 million in free cash flow over the past year.
For a company that's expected to grow its profits at more than 19% per year over the next half decade, that makes for a couple of exceptionally good valuations -- a price-to-free cash flow ratio of less than 15 times for the stock or, if you net out Polycom's cash stash, an enterprise value-to-free cash flow ratio of less than 13 times for the business.
Call me a Fool, but I think Polycom's cheap.
Further Foolishness on Polycom can be found in:
