Summary
- Earnings are expected to be announced after the close on the 10th.
- Luna has strong potential long-term, although profitability from new business lines has not come as fast as originally envisioned.
- Shares remain cheap from an asset & sales standpoint.
- However, significant overhead resistance may need a breakout that will not occur on this present up-move.
Intro
If we take a look at a long-term chart of Luna Innovations Incorporated (LUNA) (Fiber Optic Player), we see that shares earlier this year broke below their respective multi-year uptrending trend-line. In fact, shares then went on to register a sustained set of lower lows until finally bottoming out in early October of this year. Since then though, shares have rallied well over a dollar per share and currently trade around the $5.30 mark. The strong rally has resulted in the weekly MACD indicator gaining some traction on the upside. Furthermore, it is encouraging to see that the ADX indicator (which is a pretty reliable indicator on weekly charts and always lags or confirms the MACD bullish crossover) is closing in on an intermediate Buy signal.
Despite the recent rally, however, shares still have significant overhead resistance to surmount (as depicted below by the two distinct trendlines) before we can state that Luna Innovations is on the precipice of a fresh bull run. Bullish investors will be hoping that the company's upcoming third-quarter earnings numbers will result in continuing momentum to the upside. Consensus is expecting a normalized EPS estimate of $0.06 on revenues of $29.4 million.
Q3 Target
Suffice it to say, if Luna's Adjusted EBITDA target can be met or exceeded in Q3, it will keep the company on course for roughly $11 million in Adjusted EBITDA for the full year. Furthermore, there were some bullish trends in the company's second-quarter earnings report in August where we saw gross margin hit 61% due to higher sales plus a more favorable product mix. This really is the crux of the issue which is Luna's capability of boosting its core profitability over the near term. This will not be easy due to having to operate in an environment of supply chain headwinds notwithstanding the fact that huge work needs to be done with respect to incorporating the company's recent acquisitions.
Strong Demand & Costs Expected To Fall
Demand concerning bookings continues unabated and management has done well on the cost side. In fact, the higher reported costs in Q2 for example (since a high portion of expenses were acquisitions-led, so being temporary in nature) painted a false picture of Luna's overall profitability. Bulls will be looking for significant synergies to come off those deals which the market should quickly begin to price in once it sees signs of the same.
Higher Inventory Needed
Inventory surpassed $30 million in Q2 with operating cash flow (-$4.7 million) coming in negative for the quarter. The more capital management has to plow into its inventory, the less internally generated capital will be available for investment purposes all things remaining equal. Unfortunately, the market does not care about shortages and supply-chain limitations but this has been par for the course for some time now. Management continues to work around the problem successfully but obviously at a cost of having to tie up extra capital.
Cheap Valuation, But Will It Be Enough?
Although the company's book and sales multiples of 1.97 & 1.84 demonstrate the undervalued nature of Luna, the company's current profitability or lack thereof may mean that shares will not be able to overcome that significant overhead resistance alluded to earlier in this present bull run. Shares remain well below their 200-day moving average ($5.98) and although forward-looking earnings estimates received a nice bump over the past month or so, it is likely that there will be a time lag before we can see the real potential of the likes of LIOS really come to the fore.
Suffice it to say, given the array of moving parts in Luna's businesses (Legacy products, OptaSense, LIOS , etc. & the Communications testing segment), investors will be especially keyed into the performance of the new product lines (recent acquisitions) in order to gauge at a minimum the short-term performance of this company. The likes of ODiSI & HYPERION are proven in the sense that demand for these product lines will have already been priced in. The question is how will the new kids on the block perform as here is where the uncertainty lies. Bulls will be hoping these businesses can deliver.
Conclusion
Luna Innovations Incorporated is expected to announce its third-quarter earnings numbers on Thursday the 10th of November after the close. Momentum has been very strong over the past four weeks, so it will be interesting to see how the market gauges Luna's results. We look forward to continued coverage.
For further details see:
Luna Innovations: Assessing If Q3 Earnings Can Keep The Momentum Going