FARO Technologies: Reach out and touch some products
With the U.S. auto industry in a prolonged slump, the red ink has been trickling down to the balance sheets of auto equipment suppliers like oil from a leaky engine.
Of course, there are always exceptions, and a promising one is FARO Technologies Inc. (Nasdaq:FARO). The Lake Mary, Fla. company makes unique robotic arms and laser devices that measure parts rolling off manufacturing lines at auto, aerospace and heavy equipment makers, among others.
FARO handed Wall Street a Valentine’s Day present with its 2007 fourth-quarter results, reported Feb. 14. Earnings were up 127% to $8.4 million, or $0.50 per diluted share, compared with $3.7 million, or $0.25 per diluted share, a year earlier. Fourth-quarter revenue was up 34.9% to $59.2 million, from $43.9 million in the year-ago quarter. The Street consensus was for earnings of $0.34 per share, while analysts had a consensus revenue estimate of $53.04 million for the quarter.
That is, however, coming off a weak quarter, in which its sales fell below both the trend line and the Street consensus. Still, analysts take heart in the latest quarter and in the growth in 2007, in which revenues rose 25.7% to $192 million. “The growth we saw in 2007 should have a positive effect on 2008 and 2009,” said Mark Jordan, an analyst with Noble Research.
The fourth-quarter earnings gave the stock a nice pop. From a 52-week low of $19 in mid January, it jumped to over $34 in late February, and has since settled back to $32.22 at Tuesday’s close. Its 52-week high was $50.27, reached last October. Its market cap is $537 million.
There is still room to grow. Jordan has a target price of $39, while Richard Eastman at Robert W. Baird & Co. is looking for $36. “It’s an aggressive small-cap growth name,” Eastman said.
FARO was originally founded to create articulated robotic arms for medical uses, such as robotic surgery. But in the mid-1990s, it found a bigger market providing quality control for manufacturers. The portable arm can reach out and touch newly made parts right on the factory floor, generating measurements to see if everything is within specification. Its software automatically checks the measurements against the computer-aided design programs that generated the specs.
That enables manufacturers (auto suppliers make up its biggest customer base, 35% of the total) to improve quality and efficiency with instant feedback. The alternative is to take occasional samples off the line, ship them to the quality control lab and measure them by hand.
Both analysts say their projections of 20% revenue and earnings growth per year through 2010 are conservative, just in case the market does affect future sales. “We’re sandbagging for a recessionary environment,” Jordan said.
The company is emerging from an oily past. In 2005, when under different management, FARO was hit with a shareholder suit after the stock dropped when expenses got ahead of revenues. On Feb. 28, FARO announced an agreement to settle the suit for $7 million, which will be covered by insurance.
It also had to pay a $2.5 million settlement for shenanigans by its Chinese sales force, which inflated the sales price a couple years ago in order to give illegal kickbacks to buyers. When management found out about it, it turned itself in and replaced the Chinese team.
Finally, FARO is also coming off a year of heavy investments. It released several new products last year, something it does every three years. It’s still increasing its sales staff, but since it’s not expanding product lines in 2008 and 2009, there is room for improved profit margins.
Those new products include new versions of devices that use lasers to measure parts instead of a robotic arm that touches the items. Unlike the robotic arms, the lasers can measure giant objects such as the shape of a 40-foot fuselage for a Boeing jet plane, which would be too big for its earlier products to get their arms around. Analysts expect these devices to open up new markets for the company, including scanning crime scenes and allowing forensics labs to recreate 3-D virtual scenes for lab analysis.
FARO has only one competitor, Hexagon Metrology, which entered the market for articulated arm measuring devices when it acquired a couple small companies three years ago. There was concern that Hexagon’s deep pockets would give those products a boost, but that doesn’t seem to have happened. Although Hexagon doesn’t break out sales of its subsidiary, analyst Jordan believes that FARO has at least twice Hexagon’s revenues in the market.
FARO has a long sales cycle, so the new devices may not contribute significant revenues for a year or two, but with little competition in a relatively new market that it pioneered, the company is in a great position for growth. “This is a technology that’s truly in its infancy,” Jordan said.
With its problems behind it and a largely untapped market ahead, these days the company looks more like a well-oiled machine; it may even be slick enough to succeed in a rusty market.
