CLFD - Clearfield: The Mid-Term Outlook Looks Promising But Risks Are Significant

2024-02-09 00:18:46 ET

Summary

• Sales have plummeted after three very strong years and are expected to start recovering in H2 2024.
• Profit margins are highly pressured, and Clearfield is not currently profitable.
• Current headwinds are likely temporary, as they are directly linked to the current macroeconomic landscape.
• The balance sheet is robust enough to withstand current headwinds for a very long time.
• The recent share price decline represents a good opportunity for investors with enough risk tolerance to wait for the situation to improve in the medium term.

Investment thesis

After strong fiscal 2021, 2022, and 2023, Clearfield ( CLFD ) is currently suffering a rebound effect as customers have excess inventories and are postponing orders. Net sales fell by 60.17% year over year in Q1 2024 and profit margins have plummeted due to lower volumes, pushing the EBITDA margin well into negative territory. As a consequence, investors are very pessimistic compared to fiscal 2021, 2022, and H1 2023, and the share price already trades 79% below all-time highs reached in November 2022. Still, things are not that bad and, in reality, what the company is currently facing is a stabilization after three years of exceptionally high demand, so it is important to look at the current situation and not consider the recent performance as a trend. That is why, despite the recent fall, the share price is still 51% above the close of 2019 (before the coronavirus pandemic).

Following the strong demand for fiber optic products during the coronavirus pandemic and the subsequent reopening of the global economy, customers increased orders even further to build significant inventories in 2022 and 2023 to prepare for the high demand expected from 2025 when projects under the Broadband Equity Access and Deployment (BEAD) program, which is endowed with $42 billion, begin receiving funding. As a consequence, customers now find themselves with excess inventory. Furthermore, tightening financing conditions have temporarily paused many infrastructure projects, with which Clearfield is suffering a very significant decrease in orders....

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