FARO Technologies (FARO): Is This Small Cap 3D Measurement Stock Still a Winner?

Yesterday, shares of small cap 3D stock FARO Technologies, Inc (NASDAQ: FARO) fell 4.77% to $40.54 after Needham & Company downgraded the stock from Buy to Hold and said that a recovery appears priced into the stock already – meaning it might be time to take a closer look at the stock and whether it still offers something to existing or new investors.

What is FARO Technologies, Inc?

Small cap FARO Technologies calls itself the world's most trusted source for 3D measurement technology as the company develops and markets computer-aided measurement and imaging devices and software. FARO Technologies' Technology permits high-precision 3D measurement, imaging and comparison of parts and compound structures within production and quality assurance processes with the devices the company creates being used for inspecting components and assemblies, production planning, documenting large volume spaces or structures in 3D, surveying and construction, as well as for investigation and reconstruction of accident sites or crime scenes.

The company's customers are in a diverse range of industries and come in all sizes:

What You Need to Know About FARO Technologies

In his research note, Needham & Company analyst James Ricchiuti wrote:

"We are reducing our rating on FARO to Hold from Buy, with the stock having surpassed our price target at the same time that a challenging competitive environment could limit upside potential to estimates over the next year. With more than $10/share of net cash, FARO shares should continue to enjoy a solid measure of downside support as management works to jump-start growth, including rolling out at least one major new product in the Q4. That said, we think growth over and above the low-double-digit revenue increase we are assuming for next year will be harder to come by in the current operating environment."

With that in mind, investors should note that the last time FARO Technologies reported earnings, it reported revenues of $68.3 million verses $66.8 million for the second quarter of 2012 along with net income of net income of $3.6 million verses $4.7 million. It should be noted that year-over-year new order bookings fell 6.1% to $66.7 million, gross margin was 54.0% verses 55.5% due to lower average selling prices for certain metrology products and operating margin decreased to 8.0% verses 10.3%.

In the earnings call (the transcript is available on Seeking Alpha here), it was noted that the top five customers by sales volume in the second quarter were Boeing, General Motors, Global Tooling Systems, Dimensional Certification and the US Military, which collectively represented only 4.1% of sales – meaning the company has a diversified revenue base. The President and CEO also noted:

"While the Americas remains a bit of a bright spot, achieving double-digit sales growth in the second quarter, European and Asian economic conditions remain relatively weak and are having a real impact on the business. Customer interest is strong in those regions but purchase decisions are being delayed."

And:

"However, convincing new customers to purchase in this environment is obviously a more difficult task. As I just stated, there is good interest, but getting them to invest in something new in this environment remains challenging."

To manage these headwinds, he noted the company is investing in new sales people in all three regions and they are increasing product development resources and spending plus: 

"The next 12 months will be very exciting for us on the product side and we are positioned to maintain an aggressive pace of introductions well into the future."

"We're continuing to look aggressively at acquisition opportunities to help us broaden our portfolio, while simultaneously strengthening the offerings we provide to our customers. With close to $180 million in cash, we have substantial capacity for growth through M&A."

Share Performance and Valuation: FARO Technologies, Inc

On Wednesday, small cap FARO Technologies fell 4.77% to $40.54 (FARO has a 52 week trading range of $31.10 to $45.88 a share) for a market cap $692.88 million plus the stock is up 17.9% since the start of the year, down 1.9% over the past year and up 92.1% over the past five years – meaning it has sort of outperformed the NASDAQ: 

Here is the latest technical chart for FARO Technologies:

Finally, it should be mentioned that FARO Technologies has a trailing P/E of 35.25 and a forward P/E 27.21.

The Bottom Line. Existing investors might just want to hold tight on FARO Technologies, but new investors may want to look elsewhere while keeping an eye on the stock and its next earnings report.