EMCORE Is Dirt Cheap at Current Levels
Often I would search the stock market dumpster for technology stocks that have been discarded by investors, where I feel there’s an opportunity to buy someone else’s trash and gain later.
Now, there’s no guarantee that these battered stocks can be revived, but I found a micro-cap technology stock that is actually growing and is dirt cheap, based on the valuation.
The stock I’m looking at is EMCORE Corporation (NASDAQ:EMKR), which is down 15% this year and well off its 52-week high of $11.70 in July 2017. EMKR stock traded at many times higher in 2007/2008 so, the way I see it, there’s a potential massive opportunity.
Chart courtesy of StockCharts.com
EMCORE is not a new start-up; it has been around for over three decades. The growth and valuation I see in EMKR stock is outrageously overlooked.
The company develops Indium Phosphide optical chips, components, subsystems, and systems geared for the broadband and specialty fiber optics market.
Perhaps I’m missing something in my analysis but, if I’m right, we could see an upward surge in EMKR stock.
My Fundamental Bull Case for EMKR Stock
EMCORE has driven revenues higher in two consecutive fiscal years (ending in September), achieving growth of 66% from FY14 to FY16.
The concern is that the revenue growth rate fell to 12.65% in FY16. Yet, if the estimates are correct, revenue growth is expected to return to 34.8% (to $124.04 million) in FY17, but contract to 6.7% in FY18. (Source: “EMCORE Corporation (EMKR),” Yahoo! Finance, last accessed November 23, 2017)
The revenue picture for EMCORE clearly needs some consistency in order for investors to buy into the story, but the fact that revenues are growing and gross margins have risen to over 33% in FY15 and FY16—versus a mere 22% in FY14— offers us some hope.
The reality is, there are numerous technology companies that are rewarded by the market, despite reporting much weaker fundamentals.
EMCORE is also quite profitable and has been for three straight years. After earning $0.19 per diluted share in FY16, EMCORE could drive its earnings much higher to $0.53 per diluted share in FY17 and $0.64 per diluted share in FY18.
The fiscal third quarter witnessed a 7.1% earnings per share (EPS) miss, but EMCORE did manage to grow revenues 38.3% year-over-year and earnings by 86.4%.
EMCORE also has no debt and $2.46 per share in free cash. This means you are paying only $4.96 per share for the stock after discounting out the cash.
EMKR stock could be a value trap, but how can you not look at a technology growth stock that is trading at a mere 1.7 times book value, 11.56 times FY18 EPS, and with a cheap price/earnings to growth (PEG) ratio of 0.95. Discount in the cash, and the PEG is even cheaper.
Based on the valuation, EMKR stock could appreciate by over 50% and still be cheaper than the S&P 500.
Technically, an uptick in the relative strength back toward the levels seen in December 2016 could drive EMKR stock to recover its downside trade gap from July 2017.
EMCORE stock has seen its relative strength rise from the August lows. The risk is support down at $6.80–$7.00, but a much deserved rally could propel EMKR stock by over 60% to the $12.00 level.