How Did It Double?
Every once in a while a company comes along that really hasn't had a whole lot of news behind its rise. Such is the case with today's Daily Double, Meade Instruments, which is a company most amateur astronomers are familiar with. There has been essentially no hot news on the wires concerning Meade, but Wall Street noticed that Meade has very nicely expanded its core business and is showing vibrant earnings and sales growth.
Just how vibrant? Check out the latest pro-forma results:
Meade Instruments (for the 9-months ended Nov. 30):
1999 1998 Change
Sales $111.2 $85.0 30.7%
Operating Income $20.3 $11.5 76.2%
Net Income $10.9 $5.6 94.0%
EPS $1.45 $0.79 83.5%
(in millions except EPS)
Operating Margin 18.3% 13.5%
Net Margin 9.8% 6.6%
Source: Company filings
It should be apparent that Meade is doing something right to post these kinds of numbers, and the simple and obvious thing that Meade is doing successfully is making affordable products that are highly sought after by amateur astronomers everywhere. Its new products, including the ETX-90EC telecscope, have been well received by consumers and the scientific press, and new and expanded distribution arrangements with retailers such as Sam's Club, Price Club, Target, Costco and Wal-Mart have helped expand the reach of Meade's products.
In short, one might say that Meade's stock has gone the same direction its products are pointed -- toward the sky.
Business Description
Meade Instruments is one of the leading companies involved in the design and manufacture of telescopes and related equipment for amateur astronomers. Other products include binoculars and microscopes. Approximately 60% of the firm's sales are to amateurs, with the balance to universities and other private laboratories.
Based in Irvine, California, Meade was founded in 1972 and came public in 1997.
Financial Facts
Income Statement
12-month sales: $119.8 million
12-month income: $11.5 million
12-month EPS: $1.55
Profit Margin: 9.7%
Market Cap: $214 million
Balance Sheet (as of 11/30/99)
Cash: $2.7 million
Current Assets: $70.4 million
Current Liabilities: $36.1 million
Long-term Debt: $5.3 million
Ratios
Price-to-earnings: 18
Price-to-sales: 1.8
How Could You Have Found This Double?
One of the best ways to start the investment research process is to look at the products and services that excite you the most. In talking to a handful of weekend astronomers for this piece, the nearly unanimous opinion was that Meade makes high-quality products at prices that are well within reason for most hobbyist's budgets. Making products people want at reasonable prices, while keeping (or growing) profitability, is a surefire recipe for success.
While one may have liked Meade qualitatively, even those who started with quantitative financial analysis would have been interested in what they saw. The company's margins, both gross and net, have been steadily rising for some time now. Couple that with growing sales and, magic, exploding profits.
Meade also has seen a fairly dramatic improvement in its return on assets and equity over the past three years. In its first year as a public company, Meade had an ROA of 16.4%. Last fiscal year, the company's ROA was up to 18.7%. When the books are closed for this fiscal year in a couple weeks, Meade looks to have an ROA somewhere near 25%. Long story short, companies that can deploy their capital and get returns exceeding their cost of capital are in a great position to add value for their shareholders.
One final way to have perhaps found Meade was to look at how the company has beaten its earnings estimates for the past several quarters. When a firm can consistently beat its estimates by anywhere from 30% to 100%, it's worth taking notice.
Where to From Here?
There are two things to keep in mind when looking at Meade. First, the company operates a highly seasonal business, with sales of telescopes being highest in its third fiscal quarter that ends on November 30. Telescopes are very popular holiday "toys" for adults. The seasonality can be observed easily by looking at the company's historical quarterly sales. This means doing comparisons to the previous year is more meaningful than looking at the sequential rising and falling that happens every quarter.
A second factor to be mindful of is the fact that Meade recently bought out a German distributor of optical products, and it's important to take this acquisition into consideration when looking at the company. Today, pro-forma results are probably more relevant than the as-reported results.
With that said, is Meade going to continue to defy gravity, or will it come crashing to earth? One of the more interesting points with this Double is that Meade's valuation really hasn't changed all that much over the past year, even though the stock has performed quite well. This time last year the stock was near $12 a share and had $0.77 per share in trailing earnings, for a P/E ratio of roughly 15x. At this writing, the stock is at $28 per share with $1.57 per share in trailing earnings, for a P/E ratio just shy of 18x. Meade's rise has simply been thanks to solid financial growth, and not to multiple expansion.
The bottom line is that Meade is an interesting little company to keep an eye on. The astronomy market may not be growing by leaps and bounds, but Meade has managed to find its niche and grow its profits quite nicely. Even if Meade's earnings growth slows a bit in the coming year, it could continue to make its patient shareholders quite happy.
Related Links:
Meade Instruments Snapshot
See Also