There's a reason why most of us Fools suggest that you use the P/E and other popular valuation ratios as a starting point, not a conclusion. You see, not all bargains are as impressive as they appear. Consider WestellTechnologies (NASDAQ:WSTL), a broadband equipment supplier that seems to be on the wrong side of the markets.
Revenue was up 7% this quarter, including a bit of a boost from an acquisition last year. The consumer networking equipment division, the largest revenue producer, was up only 1%, while the remaining conferencing services and network service access businesses were up about 11% and 36%, respectively. Unfortunately, this modest growth produced little juice. Gross margins firmed up a bit, but operating income declined on higher marketing and R&D expenses.
Westell seems to be stuck selling low-end, low-margin products. While some of its new products and technologies, like the VerizonOne, look appealing, customers have been slow to embrace them. Worse yet, that customer base is shifting. Verizon (NYSE:VZ) is still on board, but AT&T's (NYSE:T) purchase of BellSouth is a threat; Westell did good business with BellSouth, but not so much with AT&T.
There's also a broader technology risk to consider. Companies like Verizon are charging ahead with fiber-to-the-x (FTTx) projects, and I'm not sure where that leaves Westell in the future. Maybe it can come up with suites of products to stay in the game. Maybe not. The company faces still competition from the likes of ADC Telecommunications (NASDAQ:ADCT), Cisco (NASDAQ:CSCO), and Siemens, one of AT&T's competing suppliers.
Though analyst expectations were rather modest, the company still isn't living up to them. On the other hand, Westell is cash flow-positive, with no debt and more than $0.50 per share in cash.
I bought these shares once back in late 2002, when the market had left them for dead, and I was treated to a lucrative run-up. This might be a similar opportunity, especially if products like the VerizonOne pay off. All the same, I'd be careful about making a big bet on this one until there are real signs of progress on the revenue line.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
