If you have access to MF Canada, I suggest you check out today’s update on Avigilon. If not, here is a very brief summary.
…Avigilon’s performance of late has been ugly and deserves some communication. The only problem: There’s nothing really material to communicate. Since the company’s last quarterly earnings release some time ago, nothing has occurred or been publicly disclosed that would cause the sell-off we’ve seen in the stock. As far as the facts are concerned, by declining as it has, the stock has clearly separated itself from the underlying business… … nobody has any idea what’s up…
Stick to the facts. To reassure myself in these kinds of circumstances…, the first thing I do is look at the company’s balance sheet. Avigilon has no debt, $158 million in cash, and has been free cash flow positive over the past 12 months. There is absolutely zero financial risk at this point. That’s a good thing.
Next I consider valuation. At current levels, what’s the market telling us about this stock? To get a handle on this, I went searching for companies that share several of Avigilon’s characteristics. …Specifically, I was looking for companies that have a market capitalization between $500 million and $1 billion, are expected to grow revenues between 30% and 50% over the next year, carry an EBITDA margin of 15%-20%, and have no debt. There are no other companies like this in Canada, so I turned to the Nasdaq Composite…
Though Avigilon is trading a touch above the group on a trailing earnings basis (and note that many of these companies don’t even have positive earnings), it comes in well below on every other metric… Provided Avigilon’s results remain even somewhat in touch with expectations, and where they’ve been in the past, this gap is bound to close. At the very least, the spread should not get much wider…This is not an exact science by any means, but either way you look at these findings, Avigilon’s currently trading at a level that it doesn’t seem to warrant—at least based on the facts.
The Foolish Bottom Line None of this is to say that we’re not going to wake up tomorrow to a press release that indicates Avigilon is cutting its guidance… Still, in my mind, even this news has largely been priced in…it is close to impossible to try to take the temperature of a market that is irrational at least as often as it is rational. To be frank, we won’t be overly bothered if the company does cut guidance. We are only interested in knowing that the prospects of the business over the long term remain as they were when we first recommended this company.