EXFO Inc: Tech Stock Up 50% in 2019 & Immune From U.S. Trade War With China

EXFO Inc Reports Strong Q2 Results and Outlook

EXFO Inc (NASDAQ:EXFO) is a great tech company that is located miles away from Silicon Valley and is immune from the current trade war between the United States and China.

The Dow Jones Industrial Average, the S&P 500, and the tech-heavy Nasdaq are set for their worst May in decades as the U.S.-China trade war ramps up. The U.S. recently raised tariffs on $200.0 billion of Chinese imports from 10% to 25%. China retaliated by raising tariffs on $60.0 billion worth of U.S. products.

While President Donald Trump has said that Chinese firms would bear the cost of his tariffs, that’s not generally how a trade war works. U.S. companies will simply pass the increased costs onto consumers. That means electronics like TVs, cameras, phones, and computers made in China will cost a lot more.

Since EXFO stock trades on the Nasdaq, it took a small hit following the tariff announcements.

Nevertheless, EXFO recently reported strong second-quarter financial results and a strong outlook, one that will not be hindered by the ongoing trade war.

EXFO Inc Overview

EXFO is a Canadian company, with its headquarters in Quebec City.

It provides testing, monitoring, and analytics solutions for fixed and mobile network operators, web-scale companies, and equipment manufacturers in the global communications industry. (Source: “Investor Presentation,” EXFO Inc, April 15, 2019.)

The company is ranked No. 1 in the fiber optic test solutions market and is a top-5 player in the communications monitoring market.

EXFO operates in more than 25 countries and has more than 2,000 customers, including tier-1 communications service providers, network equipment manufactures, and web-scale companies.

EXFO Inc Stock

(Source: “EXFO Inc. (EXFO),” Yahoo! Finance, last accessed May 15, 2019.)

EXFO stock is up roughly 50% in 2019.

Following its fourth-quarter swoon, the company’s share price rebounded in 2019. By late April, the stock had advanced 65%, breaking through resistance levels at $4.40 and $4.60 and erasing all the losses it incurred during the marketwide sell-off in October and December 2018.

That said, EXFO’s share price took a slight fall on May 13 after the U.S. announced that it was hiking tariffs on Chinese products and China retaliated in kind.

The tech sector was hit pretty hard and EXFO stock was collateral damage. Since then, however, the stock has been rebounding.

Chart courtesy of StockCharts.com

Strong Second-Quarter Results

On April 2, EXFO released its financial results for the second quarter ended February 28. (Source: “EXFO reports second quarter results for fiscal 2019,” EXFO Inc, April 2, 2019.)

Second-quarter sales increased 14.2% year-over-year to $73.9 million. That was at the high end of the guidance range.

Bookings, which included a $10.3-million contribution from the company’s February 2018 acquisition of Astellia S.A., improved 16% year-over-year to $76.1 million.

Compared to 60.9% in Q2 2018, gross margin before depreciation and amortization totaled 60.7% of sales in Q2 2019.

Net earnings in the second quarter came in at $5.2 million ($0.09 per share), compared to a net loss of $4.7 million ($0.08 per share) in Q2 2018.

Adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) totaled $8.8 million (11.9% of sales), in Q2 2019, compared to $2.5 million (3.9% of sales) in the year-ago period.

Cash flow from operations swelled to $18.7 million.

“Clearly, EXFO is on track with its profitable growth strategy amid a rapidly transforming industry,” said the company’s CEO Philippe Morin. (Source: Ibid.)

Looking ahead to the third quarter, EXFO expects to report sales between $70.0 and $75.0 million and a net loss of between $0.04 and $0.00 per share. The expected third-quarter net loss includes $0.05 per share in after-tax amortization of intangible assets and stock-based compensation costs.

Full-year adjusted earnings are forecast to climb 133% to $0.21 from $0.09 in 2018, with revenue advancing eight percent.

Analyst Take

EXFO Inc is a great tech stock for investors that like to see improved metrics and capital appreciation.

The company reported strong second-quarter results and a strong earnings outlook. Since EXFO is a Canadian business, its products and services should not be negatively affected by the U.S.-China trade war.