Sometimes you're right, but for all the wrong reasons. Last Thursday was one such day.
In a column last Wednesday entitled CNS Set Up for a Fall, I predicted that shares of Motley Fool Hidden Gems pick CNS (NASDAQ:CNXS) would swoon in the wake of its Thursday, Oct. 27 earnings release. The reason being that analysts following the company were tired of seeing their earnings estimates blown out of the water by the little cold and flu fighter, and so they had set their sales and earnings expectations unreasonably high -- too high for the company to meet.
As it turned out, though, CNS did meet analyst expectations. In fact, it crushed estimates of $25 million in sales and $0.28 in earnings per diluted share, recording $26.1 million in actual sales and $0.30 in profits. Outstanding.
And yet the stock fell, declining as much as 10% in the wake of the announcement -- quite a strange reaction to its beating estimates, growing both revenues and profits 30% year over year, and growing profits per diluted share by 25. So let's take a closer look at the results and see whether we can't dig up whatever it was that had investors feeling spooked last week.
First up on this front is stock dilution. CNS made a point of highlighting its stock buybacks in the earnings release. Over the first six months of the year, it has spent $7.3 million to repurchase 355,105 shares of its own common stock, or about 2.4% of its diluted share count. That would be great, except for one thing: The company's diluted share count actually increased over the past year, by 2.4%. Add it up, and pre-buybacks, CNS diluted its outside shareholders by 4.8% over the past year.
Next up, inventories. CNS noted that its addition of new product lines will require it to carry larger inventories this year than last. And indeed, inventories have risen about 60% over their year-ago levels.
On the plus side, however, while the company didn't provide investors a cash flow statement (shame, shame), it did mention that cash from operations year to date has hit $6.3 million. That's up more than 50% from the $4.1 million generated by this time last year. So unless CNS's capital expenditures significantly outran last year's numbers, the company likely generated about $6 million in free cash flow and appears on track to generate upwards of $20 million for the fiscal year.
Take that conservative free cash flow estimate and divide it into the company's $384 million market cap, and you'll find CNS trades today at approximately 19 times free cash flow. In this Fool's opinion, that's not at all an unreasonable price to pay for a firm that's growing its bottom line at a 25% clip, even after accounting for stock dilution.
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Fool contributor Rich Smith has no position in CNS.
