Strange things have been happening to the stock of security card printer and Motley Fool Hidden Gems watch list pick Fargo Electronics (NASDAQ:FRGO) over the past 48 hours or so. Just before the company's earnings release, the stock plunged as much as 15%, presumably on pre-release jitters. The next morning, after the earnings report came out, the stock rallied swiftly, only to collapse yet again. Clearly, someone wasn't impressed. (Twice.) For my part, I think Fargo's news deserves a celebration. Here's why:
Hooray for growth!
Fargo's fiscal second quarter showed growth in both revenue and profits. But its fine performance this quarter was surpassed by its even better results for the first six months of this year -- and as Fools know, in investing, it's the long term that counts. For 1H 2005, Fargo grew its revenues 13% over the year-ago period. Profits increased 42%, while profits per diluted share climbed 40%.
The crowd cheers for more
Fargo has promised that in Q3, it will at least repeat this quarter's $0.18 in profits per diluted share, and perhaps earn as much as $0.21. Even if flat growth doesn't necessarily thrill you, remember that in Q2, $0.03 worth of Fargo's profits came from a one-time litigation settlement it received from Toppan Printing Co.
If you net out the settlement's effect on profits, Fargo's Q2 earnings growth was pretty low, which may explain Wall Street's lack of enthusiasm. That doesn't detract much from the company's 1H 2005 success, however, and it means that Q3 should show a significant sequential rise in core profits.
Pour yourself a glass of cash
All too often, when a company announces strong profits growth under generally accepted accounting principles, a further read of the earnings release reveals that those "accounting profits" aren't backed up with accompanying free cash flow. Not so with Fargo. In fact, free cash flow growth mirrored the rate of GAAP profits growth, rising 42% against 1H 2004. On an absolute basis, the company actually generated more cash than its GAAP numbers let on -- $5.4 million in free cash flow versus $4.5 million in accounting profits.
A toast to smart management
Over the past six months, Fargo's cash balance has risen, its accounts receivable have fallen, and it has sold down its inventory levels and reduced its outstanding liabilities as well.
All of which has this Fool wondering -- what year is this? 1996? Because it's starting to feel like Fargo is cool again.
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Fool contributor Rich Smith does not own shares of Fargo.
