This is one call I'd rather have gotten wrong.
Way back in the May 19 edition of "This Just In: Upgrades and Downgrades," I reviewed the buy rating that BB&T Capital Markets had just assigned to Sun Hydraulics
Where to from here
Today seems like a great time to check back in on this small-cap manufacturer of screw-in hydraulic cartridge valves and manifolds, and see if its valuation finally clicks. Let's do that.
Starting with the obvious, Sun had a great second quarter. Sales jumped 19%. Profits rose 50% to $0.54 per share. The free cash flow story read even better. Although Sun hasn't been quite as strict with bill collection as we'd perhaps like (accounts receivable shot up 25% year over year), it's much stricter with its own inventories, which rose only 10%. When all was said and done, free cash flow of $13.2 million in the first half of the year stood 140% higher than at this time last year.
So what's not to like?
In a word: guidance. Sun tells us it will earn about $0.36 per share on about $45 million in revenues in the third quarter. Analysts were looking for $0.42. Hearing a number $0.06 shy of what they wanted, they concluded that all is not well at Sun.
Sun's CEO's comments didn't help matters. No sooner had Allen Carlson assured us that international sales were strong, and "the North American rebound ... continued to gain strength last quarter," then he segued into talk of "rising material input costs ... increasing utility and freight costs," and the observation that "in residential and commercial construction, we have begun to see some softening." (Never mind that Caterpillar
Guiding to $0.36 this quarter, Sun said that this number included "a charge of $775K for U.S. income taxes due on the repatriation of $6 million from Sun Germany in July 2008." Sun didn't break that down into a per-share number, but I did: It works out to nearly $0.05 a share. Five cents that, it if hadn't suddenly gone toward taxes, would have put Sun right back near Wall Street's consensus number.
Wall Street jumped the gun yesterday. It sold off Sun for no good reason -- and that's good news for you and me, because it put Sun stock on sale. Selling now for 22 times its 2008 run-rate for free cash flow (I guesstimate $26.4 million) and expected to grow at 23% long term, Sun could finally be shining.
Does the small-cap growth team at Motley Fool Hidden Gems agree? After all, they recommended the stock to subscribers. Grab yourself a free trial right here, and find out.
Fool contributor Rich Smith does not own shares of any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 408 out of more than 110,000 players. The Fool has a disclosure policy.