Acme Packet Was Priced for Unattainable Perfection

Acme Packet (APKT) was a great example of a company that was Overvalued coming into earnings, so that anything less than absolutely outstanding results will pull the stock lower. Today, the communications equipment maker reported earnings and revenues that topped analysts’ expectations but rather than getting a boost shares are trading lower by 12% on Friday afternoon. Furthermore, the company raised sales guidance for the rest of the year to $214 million to $218 million, but that was considered weaker than the market hoped to see. As for profits, for the full-year Acme expects to earn between 72 and 74 cents per share, exceeding consensus estimates of 68 cents.

Excluding items, Acme Packet earned 18 cents per share in the second quarter, a penny ahead of expectations. Sales were up 62% to $53.3 million beating projections of $52.4 million. To see the company perform better than expected and raise guidance for the rest of the year is encouraging, but it is clear to us that the stock had already priced in plenty of growth already.

According to our methodology, the market was paying more for the underlying fundamentals than at nearly any point in their history. For example, if we assume that Acme is going to hit the high end of their guidance (a reasonable best-case scenario), the company is still far from cheap. For example, the company has historically been priced between 18.3x and 54.8x times cash earnings, but coming into the day the stock was trading near the high end of that wide range at 44x. Furthermore, Acme was trading at a multiple of sales per share of 9x as of Thursday’s close, which is well above the historically established range of 3.1x to 7.8x.

Based on the current valuation, we had an Overvalued stance on the shares this week and will likely maintain that in next week’s report. It is not that the fundamentals are not growing solidly enough, rather as we saw today when the market has award such a great premium, great results may not be enough. We expect Acme to continue to grow as their business seems to be hitting its stride, but we will need to see the price decline into the low $20’s before we start to look more favorably towards the valuation.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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