Never underestimate the power of cash flows. Just look at Flow International
The maker of high-pressure water jet systems just reported earnings for the fourth quarter and full year of fiscal 2006, and turned in its first quarterly profit in years. Quarterly revenue grew 30% year over year to $63.3 million, and $6.8 million of that dropped down to the bottom line for an $0.18 profit per diluted share, blowing away the $0.12 average analyst estimate. Last year, the final quarter saw a $0.64 per-share loss.
The strong performance rests on a 104% revenue increase in Asia -- thanks to increased demand from the semiconductor industry -- and 34% higher sales in the company's bread-and-butter North American market. But perhaps most importantly, the company has gotten a handle on its capital structure again.
After a few lean years, teetering on the edge of ruin and with a permanent address in Penny Stock Land, Flow started turning things around in 2003. Interest payments on the heavy debt load were killing earnings, even in the face of revenues on the rise. But the smart investor was focusing on cash flows instead, where Flow was doing just fine.
With tighter operations and expanding margins and sales, Flow started to pay down the crippling debt, and earnings slowly turned around in response. This quarter saw the culmination of three years of smart management, and interest payments are now smaller than interest income on invested capital, so the interest line of the income statement isn't scary anymore.
A dollar invested in Flow in July 2003 is worth over $11 at today's prices, making the investment a 10-bagger over three years. The S&P 500 is up 30% over the same period, and Flow's closest competitor KennaMetal
These are the opportunities you only find if you're digging in the rubble of collapsed businesses. It's the philosophy that led some of us to Elan
It's not easy finding a phoenix ready to rise -- that's for sure -- but astute investors can sometimes find great bargains in the ashes.
Philip Durell 's Inside Value newsletter can help you find other companies set to win the pot after getting dealt a bad hand. Try a 30-day free trial and see if deep discounts are for you.
Fool contributor Anders Bylund is the proud owner of some Elan stock, though he's only holding a double right now. That's what happens if you catch a falling knife too early. He holds no position in any other company mentioned. Fool rules are here.