CALX - Calix: Pullback For The Stock Is In Time To Buy Again

2023-11-27 22:08:55 ET

Summary

• Calix's stock declined 48% due to an overvaluation and an overbought technical level.
• Calix looks attractive again as the valuation improved and with the stock bouncing higher from a support level.
• Calix's revenue and earnings are poised for future growth, as the BSP industry is expected to grow at a strong pace.

My last article on Calix ( CALX ) explained how risks for the stock were high based on an overvaluation and an overbought technical level. The stock declined 48% since then. Now that a significant pullback is in, I see Calix at an attractive entry point from a valuation, technical, and growth perspective.

Calix provides cloud and software based platforms for broadband service providers [BSPs]. The company's offerings allow broadband providers to target new revenue and to streamline operations to reduce costs. Anything that can help businesses earn more revenue and lower costs can be valuable. Calix comes through in this regard with its products/services.

Positive Q3 2023 Results

Calix exceeded estimates for the top and bottom lines in Q3 2023 . Revenue increased 11.7% to $264 million exceeding estimates by $2.3 million. That marked 10 consecutive quarters of revenue growth for Calix. Diluted earnings per share increased 26% y-o-y to $0.24 . Non-GAAP EPS of $0.45 beat estimates by 25% or $0.09. The company achieved its 5th consecutive quarter of gross margin expansion which increased by 100 basis points in Q3 to 53.8% .

Calix increased operating cash flow by 96% to $41.3 million in the first 9 months of 2023 over the $21.1 million from the first 9 months of 2022. This growth helps put the company in great shape to expand the business, to do share repurchases, and to pay down debt.

The revenue gains were largely a result of securing 12 new BSPs as customers during the quarter. The increased gross margin was primarily the result of the expansion of Calix's products & services and by selling a lower quantity of systems with overly high priced components.

The company's offerings are achieving success because they enable customers to grow their businesses while increasing efficiency to drive down operating costs. One example of this was BOYCOM Cablevision which was one of Calix's 12 new customers that were acquired during Q3. BOYCOM was able to gain customer interest through Calix's managed services while increasing efficiency which lowered operating expenses.

Calix also gave positive guidance for the fourth quarter and beyond. Calix expects revenue to increase about 20% in Q4 2023 based on the mid-point of the range of $261 million to $267 million. Calix expects gross margin to increase by 2.4% based on the middle of the range of 53% to 55% for the full fiscal year. Calix also expects to achieve over $100 million in free cash flow in 2024. This would be a significant gain over the $14.1 million of free cash flow generated in 2022 and the $18 million that Calix is on track to achieve in 2023.

Long-Term Positive Future Catalyst

Calix is poised to benefit from the long-term expected growth for the BSP industry . The global broadband services market is expected to grow at 9.7% annually to 2030 . This growth rate will bring the global BSP market to be worth about $880 billion by 2030 from a worth of $419.44 billion in 2022. Calix's offerings are likely to grow along with this industry growth as the company helps BSPs to grow revenue and minimize costs.

Calix strives through its cloud/software platforms to allow BSPs to create excitement/satisfaction among subscribers and to simplify the business of the service providers. Calix helps BSPs offer seamless support on the customer service side so that subscribers get the timely assistance that they need. The streamlining of the BSP's businesses through Calix's platforms enables them to maximize operating efficiency to minimize costs.

Calix's platforms can help BSPs to reduce cyberbullying and to provide physical security camera systems for homes. Calix can also help to allow BSPs to offer community WiFi so that everyone in the local region can enjoy connectivity.

These platforms are likely to be demanded in a growing industry. Calix is in a great position to benefit from the BSP industry growth. Therefore, Calix has a good chance of building on its recent earnings success in future quarters and years.

Valuation Improved

The recent sell-off in the stock brought the valuation down to a more attractive level.

We can see in the chart above that the forward PE ratio was in the low 70s at the end of 2022. After the significant drop in the stock price, Calix is now trading with a much more reasonable forward PE of just under 26. This is a little higher than the sector median forward PE of 23 . However, it is lower than the Software Application industry's forward PE of 33 .

I consider this a reasonable valuation level since Calix is expected to experience strong growth in 2024. Revenue is expected to increase by about 7% while EPS is expected to grow by 11% to 12% in 2024.

Another valuation metric that looks attractive for Calix is the PEG ratio. Calix is currently trading with a forward PEG of 1.3 vs. the sector median PEG of 1.9 and the Software Application industry's PEG of 4. This is an important metric because it factors in Calix's 3 to 5 year expected annual earnings growth of 20%. My research found that the growth stocks that I cover tend to perform well with PEG ratios below two. Since Calix is trading with a PEG closer to one, there is plenty of upside potential for the stock in my opinion.

Technical Perspective

We can see in the weekly chart (each candle represents an entire week) that the stock is beginning to rise from a support level in the low $30s. The stock didn't officially show a change in trend on the weekly chart according to the MACD. However, the price does appear to be bottoming as it is holding and rising from this support level. The RSI (purple line at bottom of chart) increased from an oversold condition to its moving average line (yellow line).

Investors should watch for the blue MACD line to rise above the red signal line (middle of the chart) for a confirmation of a new bull trend on the weekly chart. The last time the stock increased from this support level, it increased to the $70s. Something similar could happen in future months if conditions remain positive for Calix.

Increase Share Repurchase Authorization

On November 16, 2023, Calix increased the share repurchase authorization by $100 million. This is part of an existing share repurchase authorization. Stock repurchases can be beneficial to shareholders as they can increase earnings per share. Higher EPS can drive positive sentiment towards Calix's stock.

Balance Sheet/Cash Flow

Calix strengthened its balance sheet during 2023 as compared to the end of 2022. Total cash & equivalents increased to $135.7 million at the end of Q3 2023 as compared to $79 million at the end of 2022. Total assets increased from $884 million at the end of 2022 to $926.7 million at the end of Q3. Total liabilities decreased from $205 million at the end of 2022 to $175.7 million at the end of Q3. Having over 5x more total assets than total liabilities shows the strength of the balance sheet.

One standout item includes a significant reduction in accounts payable from $41 million at the end of 2022 to $22 million at the end of Q3 2023. Another significant reduction was made in what Calix has listed as 'Other long-term liabilities' which decreased from $6.3 million at the end of 2022 to $2.7 million at the end of Q3.

Calix's cash flow is also strong. Operating cash flow for the trailing 12 months was $47.4 million as compared to the $27.2 million that Calix had in 2022. The trailing 12 month period shows Calix spending $18.7 million in CapEx, investing $50.3 million in marketable & equity securities, repaying $9 million in total debt, issuing $32.6 million in stock, and repurchasing $42.4 million of stock. Calix was left with $13.5 million in free cash flow for the trailing 12 months. As mentioned earlier, Calix expects to achieve over $100 million in free cash flow in 2024. This should help change investor sentiment back to positive.

Calix's Investment Outlook

The improvement in the valuation and technical set-up are likely to attract investors back into Calix's stock. There doesn't appear to be a reason for more selling to occur in the stock. The main risk for Calix could be the possibility of a recession leading to a decrease in the demand for the company's offerings as interest rates remain high.

Overall, I think Calix is poised to perform well over the long-term as its offerings help BSPs to grow revenue while decreasing operating expenses. This is something that many BSPs are likely to be attracted to. The expected growth for the BSP industry should act as a positive tailwind for Calix through the remainder of the decade.

Analysts have a one-year price target of $55 for the stock which represents a gain of 45% over the current price. That target would take the PE to 33 based on expected EPS of $1.65 for 2024. That is the average PE for the Software Application industry, so the target looks reasonable.

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