CNS (NASDAQ:CNXS) has risen 125% since it was recommended in the Motley Fool Hidden Gems newsletter in 2003. But the stock is just now reaching levels last seen in 1996.
CNS has not been a high-growth story recently. Thumb through the company's last annual SEC filing and you'll see consolidated net sales over the last three completed fiscal years rose 8.8% annually. Yippee!
Fast-forward to this year, and analysts project sales will rise 18.6%. Now that's more like it! Earnings are projected to grow 19.4%. But in 2006, sales are expected to slump back to a more modest 11.5% increase, although earnings will climb 17.2%. Maybe!
The big swoon
CNS' stock got hammered after it released second-quarter results on Oct. 27. The stock peaked at $31.43 in September but has fallen 20.7% since then. Still, it trades for 21.7 times trailing earnings.
Killing the stock were sales projections for the remainder of this fiscal year. Just when investors thought they had a jackrabbit, they're reminded that this company doesn't traditionally move a mile a minute. While revenue skyrocketed 36% during the last six months, the company sees 5% to 12% sales growth in the second half. Hey, if 8.8% growth is slow, what is 5%? Ah, yes, it's downright bearish!
Look carefully
Foolish contributor Rich Smith also found some interesting numbers for investors to consider. During the first six months of this fiscal year, the company spent $7.3 million to purchase 355,105 of its own shares. That's about 2.4% of the diluted shares. But CNS diluted its outside shareholders by 4.8% over the past year. So ask yourself, "Is slow and steady worth 4.8% dilution in one year?"
Don't overlook inventories, either. The company claims it's building up inventory for new product introductions. Maybe, but when you're looking for 5% to 12% growth, doesn't a 60% build-up look supersized?
Lot
s of cash
Shareholders reading this bearish review are probably yelling, "But there's $58.9 million in cash on the balance sheet and no debt." Yes, in the grand scheme of things, a company with this sort of cash position can afford to build up inventory. I'll give you that.
But with 8.2% of the stock sold short, it doesn't look like the investment world's bears are thinking great things are ahead -- $58.9 million in cash or not.
Is CNS potentially another WD-40 (NASDAQ:WDFC)? From its IPO in 1973 to 1995, WD-40 sold only its famous namesake lubricant. Then, it decided to become a "fortress of brands" and now sells everything from hand soap to toilet bowl cleaner. Look at this chart and you'll see that all its acquisitions have done little for shareholders.
CNS ventured away from its nasal specialty in March 2000 with the launch of FiberChoice, a "bulk fiber" product. It accounted for 17.4% of total sales last quarter and is a rousing success. But one success is just that and nothing more.
Summary
CNS, even after its stock price collapse, is selling for a multiple far greater than its long-term earnings growth rate. The company has been slow at growing revenue in the past, and it looks to be headed back in that direction. Add in recent stock dilution, and you have to wonder where the excitement is.
The wild card here is what the company will do with its cash. Before buying "It's going to be a wonderful world," realize that way too many acquisitions fall short of their expectations -- ask Sara Lee (NYSE:SLE), Kraft (NYSE:KFT), and HJ Heinz (NYSE:HNZ) as they trim "non-core assets." To buy CNS for future acquisitions makes no sense.
Kraft and HJ Heinz are Motley Fool Income Investor recommendations.
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Fool contributor W.D. Crotty owns shares in WD-40. Click here to see The Motley Fool's disclosure policy.
