FARO - FARO Technologies: More Image Than Good Measures Downgrade To Sell

2023-03-30 00:36:51 ET

Summary

• FARO Technologies designs and sells products with practical, in demand, 3D/4D high-performance measurement and imaging solutions.
• The share price is down dramatically and we rate the stock a Sell despite the image as a stock moving up 40%.
• Despite a +50% gross profit FARO Tech does not consistently turn a profit; more downsides are cause for retail value investors to look elsewhere.

A Down Rating

We no longer see FARO Technologies, Inc ( FARO ) as a potential opportunity for retail value investors, as in our previous articles . We rate FARO stock a Sell at this time downhill from earlier Buy and Hold ratings.

Our exasperation holds despite a 2023 report by Acumen Research and Consulting that forecasts the 3D Imaging Market will grow by 2032 at a CAGR of almost 20% from 2023 to 2032.

Seeking Alpha’s Quant Rating totters between Sell and Strong Sell. It has maintained this position for most trading days since May 2021. The share price back then was pushing above $88 each.

Image Versus Facts

There is consensus among the few analysts following FARO Technologies. They rate the stock a Moderate Buy and believe it is undervalued with a 40% upside or more. According to NASDAQ.com , “the average price target is $38.25 with a high estimate of $56 and a low estimate of $30” during the next 12 months.

We are out-off by the 76.75 PE ratio, lackluster profits, and short interest approaching 5%. The combo leaves us doubtful the average price target will top $28 per share let alone come near to its 52-week high of $52.95.

In FY ’22, the company reported quarterly EPS of -$0.14, -$0.03, +$0.03 and +$0.38. After reporting year-end results, the share price rose to +$28.5 despite missing EPS expectations by 19%. We surmise the rise in share price was the result of the company cutting losses in FY ’22 by ~33% from FY ’21. With indestructible composure, one analyst forecasts a markedly higher share price on 8.6% revenue growth in FY ‘23 Y/Y ($375.5M), when consistent profitability keeps fizzling.

When FARO Technologies reports its Q1 ’23 on April 26, 2023, we expect another losing quarter; our estimate is the EPS will be -$0.10 or greater. Last year’s EPS for the same quarter was -$0.14. Perhaps the “improvement” is the cause justifying the optimistic sentiment. Revenue in FY ’18 was $403.6M. Revenue dropped over the next four consecutive years. FY ’22 ended with revenue at $345.77M, and that was in a year with the highest rate of inflation in 40 years.

Other downsides retail value investors need to consider are the lack of any dividend, a Beta of .99 suggesting the stock can be volatile, and that hedge funds slashed holdings since May ’22; they sold 142.4K shares last quarter. In 2020, 16 funds owned the stock. A year later, 9 owned the stock. Closing 2022, 14 funds own stock despite shares selling near their 52-week low (22.61) at $23.75 near the end of March ’23. On a positive note, corporate insiders bought 86.47K shares in the last three months and over 127.5K shares in the last year.

On February 16, ’23, Seeking Alpha issued and has maintained a severe warning about the company’s “high risk of performing badly”:

FARO Technologies, Inc. has characteristics which have been historically associated with poor future stock performance. FARO has decelerating momentum and negative EPS revisions when compared to other Information Technology stocks, to the point that it gets a Sell rating from our Quant rating system. Stocks rated Sell or worse by our Quant rating system have massively underperformed the S&P 500, as this article will describe. The company has 3M Price Performance of -15.03% while the Information Technology sector median is 7.39%.

The warning followed a 20% drop to ~$28 in January after the company announced offering $60M of senior convertible notes to mature on February 1, 2028. The company raised over $57M for working capital.

The share price topped $90 in 2021. Over the next 20 months, it cratered. The stock is -56% in the last 12 months and -21% YTD. Short interest was a low 2.44% in February ’21 when we analyzed the company for Seeking Alpha. Today, short interest is nearly double.

Operating In An Essential Industry

FARO Technologies designs and sells products with practical field applications. It uses 3D and 4D high-performance measurement and imaging solutions (M&I).

Other studies draw the same conclusions as the Acumen report. We were excited for years about the M&I technology industry and the 41-year-old FARO Technologies. Its high-tech M&I applications address a wide range of sectors in the economy:

• the defense and aerospace industries
• architecture, engineering, and construction
• the transportation industry
• energy, industrial plant and power operations, and natural resources
• fire and law enforcement investigation
• metalworking and machining, shipbuilding, and heavy equipment
• measurement services

Last September, FARO Technologies acquired for £14.5M the UK-based GeoSlam scanning company “to significantly expand and accelerate FARO’s market growth opportunity in the (4D) mobile scanning space… FARO expects the acquisition to be accretive to NON-GAAP EPS in 2023.” This is just one of 14 companies, including 5 in the last 5 years, FARO Technologies has acquired.

Last Picture

Our greatest disappointment with FARO Technologies is the stagnant SA Factor Grade of D+/C- for profitability despite its healthy 50.8% gross profit. We can only describe the revenue growth as stagnant enhanced by a slew of acquisitions. Cash flow from operations is not much better. EBIT Margin is -5.87%. Net Income Margin is -7.74%. ROE is -8.4%. ROA is -2.66%. Cash from Operations is -24.8%:

It is our position that the industry has tremendous appeal. It is a creative and essential arm to a wide range of sectors in the economy. M&I is primed for significant growth, but FARO Technologies, Inc. is too risky for small investors. The somber facts for us, as we calculate them, outweigh the putative consensus. A retail value investor might be sustained over a long-term investment in FARO Technologies, but sans a dividend and a stimulant for the share price to pop, we suggest looking elsewhere. By all standards of measurement, we rate this stock a Sell despite the image as a stock moving up 40%.

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