iStock.com/jamesteohart Contrarian Casa Systems Aims to Re-Energize Business My contrarian pick for today is Casa Systems Inc (NASDAQ:CASA), which has been kicked to the curb... Casa Systems Stock: A High-Prospects Contrarian 5G Play
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Contrarian Casa Systems Aims to Re-Energize Business

My contrarian pick for today is Casa Systems Inc (NASDAQ:CASA), which has been kicked to the curb by investors, off a whopping 59% from its initial public offering (IPO) high of $34.21 in March 2018.

CASA stock looks pretty horrific on the chart but is trading sideways in a narrow channel looking for any evidence that things will get better.

CASA stock is what I consider to be a contrarian opportunity—a time when market demand for the stock is low as the company tries to work things out.

In these situations, contrarian stocks can subsequently surge if the underlying metrics improve. However, there is no guarantee that this could happen.

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The company’s business is intriguing and makes CASA stock worth a closer look.

Casa Systems develops cloud-based software infrastructure solutions that help providers in cable, wireless, and wireline offer high-speed 5G gigabit connectivity.

The company serves over 450 companies in over 70 countries including numerous Tier 1 broadband service providers.

My bullish thesis is driven by what will be a massive demand for 5G solutions worldwide.

A look at the CASA stock chart displays a bearish double top that was followed by a negative downside gap. CASA stock is now floundering in a sideways channel.

Mr. Market wants to see if Casa Systems can reverse its downward revisions in revenues and earnings.

If that happens, CASA stock could retake the $20.00 to $25.00 levels.

Chart courtesy of StockCharts.com

What CASA Stock Needs to Do

Casa Systems increased revenues in three straight years but the trend has been negative, which poses a red flag.

Fiscal Year Revenue ($ Millions) Growth
2014 $211.28
2015 $272.45 28.95%
2016 $316.13 16.03%
2017 $351.58 11.21%

(Source: “Casa Systems Inc.,” MarketWatch, last accessed October 22, 2018.)

To make matters worse, Casa Systems is now expected to see revenues contract by 4.2% to $336.88 million in 2018 prior to rallying 16.1% to $391.01 million in 2019. (Source: “Casa Systems, Inc. (CASA),” Yahoo! Finance, last accessed October 22, 2018.)

Casa Systems is generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA) with growth in three straight years.

Fiscal Year EBITDA ($ Millions) Growth
2014 $92.64
2015 $108.22 16.82%
2016 $120.78 11.61%
2017 $143.96 19.19%

(Source: MarketWatch, op cit.)

CASA is also profitable on both a generally accepted accounting principles (GAAP) and adjusted basis but the results in 2016 and 2017 are far below the prior two years in 2014 and 2015.

Fiscal Year GAAP Diluted EPS
2014 $3.45
2015 $4.05
2016 ($0.43)
2017 $0.26

(Source: MarketWatch, op cit.)

Casa Systems needs to address its earnings pressure. The earnings estimate trend is negative, which is not what you want to see.

Adjusted earnings are expected to fall to $0.84 per diluted share in 2018 followed by a small improvement, rallying to $0.92 per diluted share in 2019. (Source: Yahoo! Finance, op cit.)

In the meantime, Casa Systems is delivering positive free cash flow (FCF), which will help as the company tries to turn its operations around.

Fiscal Year Free Cash Flow ($ Millions)
2014 $56.32
2015 $9.1
2016 $103.36
2017 $87.99

(Source: MarketWatch, op cit.)

Analyst Take

So while Casa Systems is profitable, the company needs to address its sluggish growth especially at a time when 5G is starting to pick up steam.

If Casa Systems can right the ship, the result would be a major rally in the beaten-down CASA stock.

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