What's worse for a company than having too much inventory? How
about having customers that don't have enough money to pay for the
products they've bought from you?
Indeed, a good number of technology companies are suffering from
an increasing number of outstanding receivables. The dot-com bust
left many firms without the funds to pay their bills. The telecom
landscape, for instance, is littered with faltering digital local
exchange carriers (DLECs) and competitive local exchange carriers
(CLECs) that are leaving equipment providers like Cisco
Systems (Nasdaq: CSCO)
and Lucent
(NYSE: LU)
holding the bag.
Keeping that in mind, we decided to focus this week's Stock
Screen on accounts receivable -- the amount of money owed to a
corporation. In times like these, two metrics involving accounts
receivable are particularly important to look at: accounts
receivable turnover and days sales outstanding (DSO).
BEHIND THE NUMBERS
Using the Thomson
Financial/Baseline database, Red Herring first searched for
companies that had an accounts receivable turnover rate above 5.8 --
the average ratio of the companies in the telecommunications and
technology sector we considered. Accounts receivable turnover is
calculated by dividing a company's 12-month trailing sales by its
latest receivables. So a company with an accounts receivable
turnover ratio of 6 would in theory be able to collect its current
amount of receivables 6 times in a 12-month period. The higher the
turnover rate, the better job a company is doing collecting what
customers owe it.
Next, we required that the average number of DSO to be below
67.5: the average DSO of the companies we considered. DSO is
calculated by dividing the number of days in a year by a company's
receivable turnover rate. For example, a company with a DSO of 67
would be able to collect all its outstanding receivables in 67
days.
To further whittle down the selection, we demanded a decrease in
the amount of receivables during the last quarter, 2002 earnings
expectations of greater than 20 percent, a 2002 price-to-earnings
ratio of less than 30, and a market capitalization of greater than
$500 million. Data current as of May 8 was used for this screen.
The result was 18 companies: Actel
(Nasdaq: ACTL),
Autodesk
(Nasdaq: ADSK),
ChipPAC
(Nasdaq: CHPC),
Cognizant
Technology Solutions (Nasdaq: CTSH),
Centennial
Communications (Nasdaq: CYCL),
Electronics
for Imaging (Nasdaq: EFII),
Fairchild
Semiconductor (NYSE: FCS),
Ixia
(Nasdaq: XXIA),
Luminent
(Nasdaq: LMNE),
Lexmark
(NYSE: LXK),
Microsemi
(Nasdaq: MSCC),
Perot
Systems (NYSE: PER),
Price
Communications (NYSE: PR),
SonicWall
(Nasdaq: SNWL),
STMicroelectronics
(NYSE: STM),
Symantec
(Nasdaq: SYMC),
Teradyne
(NYSE: TER),
and Ultratech
Stepper (Nasdaq: UTEK).
We decided to focus two of the more promising companies: Ixia and
Symantec.
R&D REJUVENATION
Even in an economic
slowdown, companies can't afford to mortgage their futures by
cutting back on research and development: this philosophy is the
basis of Ixia's business model. Ixia provides systems that allow
customers like Cisco and Nortel to measure the performance of their
data communications equipment and networks during the development
stage.
Evidence that R&D is still alive, even in the current tough
climate, Ixia has added close to 100 new customers over the last
six months. Analysts also expect that a couple of new testing products
will help Ixia attract even more clients. The first, an OC-192 card,
is used to measure the performance of backbone routers, and, the
second, big error rate tester (BERT), generates traffic and then
tests for errors on that traffic. BERT opens up a new customer base
for Ixia: optical switch vendors like Ciena
(Nasdaq: CIEN)
and Sycamore
Networks (Nasdaq: SCMR).
Ixia is also penetrating new accounts within each customer, selling
equipment to various divisions of a single company.
"That is where the value-add of the product comes in," says Seth
Weber, analyst at Merrill Lynch. "Going forward, about half of the
company's growth will come from new products, and the other half
will come from ongoing sales of legacy products."
The company does face some competition from Agilent
(NYSE: A)
and Netcom Systems, owned by Britain's Spirent. "Ixia's recent growth
suggests that it is making good progress in penetrating new accounts
and perhaps taking market share from competition," Mr. Weber says.
As a result, Ixia still sees high demand for its products. With
sales of $94 million in the last 12 months and receivables of $12
million in its latest quarter, the company has an accounts
receivable turnover ratio of 8. Ixia's DSO is just 56. To add to the
good news, Ixia is expected to grow its earnings by 35 percent in
2002. Such growth is even more attractive when coupled with a 2002
P/E ratio of only 25.
SECURING THE SECURITY MARKET
So far, security
is one sector that has been buffered from the economic slowdown. And
content and network security solutions provider Symantec is in just
about every business category. Indeed, Symantec offers a
comprehensive suite of products such as virus protection, intrusion
prevention, and email filtering for consumers and small and large
businesses around the world. International revenues represented 45
percent of total revenue in the quarter ending in March, a 27
percent uptick from the same quarter last year. Such product and
geographic diversity gives the company a cushion during hard
economic times.
But Symantec doesn't need much of a cushion, as security is still
a priority in many IT departments. According to a Forrester Research
survey of 50 senior security managers from large corporations, IT
security spending at the companies surveyed will increase from an
average of $2.9 million in 2000 to $4.5 million in 2002, a
compounded annual growth rate of 25 percent.
"People continue to worry about digital assets," says Ken
Kiarash, an analyst at Buckingham Research Group. "Even though
spending on hardware and software is slowing, companies still need
to increase security on their existing systems."
In the past, Symantec's strength has been in the consumer market
with its Norton products dominating worldwide sales. But recently,
the company has made substantial inroads into the business market,
which represented 65 percent of total revenues during the quarter
ending in March, a 35 percent year-over-year increase. "The
enterprise market is the fastest-growing segment in the security
arena and is now the biggest focus for Symantec," says Mr.
Kiarash.
Indeed, Symantec is hoping to become a one-stop shop, recently
adding to its portfolio managed security services. During the latest
quarter, the company signed 17 deals worth more than $300,000 each
from Reuters
(Nasdaq: RTRSY),
Intel
(Nasdaq: INTC),
BellSouth
(NYSE: BLS),
and the Navy/Marine Corps, among others. And Symantec has had no
problem collecting payments from its customers. With sales of $854
million in the last 12 months and receivables of $118 million, its
accounts receivable turnover is 7. And its DSO is a stellar 22.
Symantec's earnings are expected to increase by 32 percent in 2002,
as the company is capitalizing on the rapidly growing business market.
Trading at only 21 times its estimated 2002 earnings, the stock
looks like a good buy.
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