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Alliance Fiber Optic Products (AFOP) - Undervalued Micro Cap?

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February 04, 2014 – Comments (5) | RELATED TICKERS: AFOP

Alliance Fiber Optic Products (AFOP) designs and manufactures components used in the connection of optical fibers and optical fiber networking solutions. Today the stock fell 22.4% after reporting supposedly "disappointing" results. 

Let's see what constitutes "disappointing" to Mr. Market: Year-over-year revenue increased 79%, net income (excluding one-time tax benefits in 4Q 2012) increased by 136%. Wow, what terrible results. Sell. SELL!

Some things to like about AFOP: 

** The company is growing like nuts. Sales expanded 63% in 2013. In the first three quarters of 2013, the company produced $12.23 million in operating cash flow, compared to $9.34 million produced in all of fiscal 2012. 

** Peter Chang -- founder of AFOP in 1995 -- serves as Chairman, CEO, and President. Chang is largest insider owner of the business, owning 2.13 million shares of the stock. 

** Management expects sales to increase by at least 85% in the 1Q 2014. In other words, there are no signs the company's growth is slated to stop anytime soon. 

** The stock is trading at a P/E just under 12.5. Are you kidding me? 

** $46.68 million in cash with no debt. 

** This is a tiny and, basically, unfollowed business. One lonely analyst follows the company (which has a market cap of just $221 million). That one analyst, for what it's worth, anticipates AFOP's earnings will grow 25% annually over the next five years. 

All in all, AFOP is a business that is rapidly growing its top and bottom lines, shows no signs of letting up growth, has a strengthening balance sheet thanks to stellar cash flow production, and an active/experienced founder and leader. That's a lot to get for a P/E under 13. 

I'll probably rate this an outperform on CAPS tomorrow. Micro caps can be tricky to evaluate (and very volatile, as AFOP's performance today demonstrates), but AFOP seems to have solid financial growth, involved management, and bright prospects trading at a very reasonable valuation. 

Best,
David K

5 Comments – Post Your Own

#1) On February 04, 2014 at 11:23 PM, TMFPencils (99.81) wrote:

Full disclosure: I only know about AFOP thanks to the work of Saul: http://boards.fool.com/afop-31100682.aspx?sort=whole#3110068...

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#2) On February 05, 2014 at 5:48 AM, Zundels (79.80) wrote:

On November 1, 2013, the Company held a special meeting of its stockholders (the “Special Meeting”) at which stockholders approved an increase in the number of shares of authorized Common Stock from 20,000,000 to 100,000,000 shares and an increase by 900,000 the number of shares of Common Stock available for issuance under the 2000 Stock Incentive Plan.

That is from there 10-Q filed 13NOV13. That seems like a lot of new shares they are issuing. Isnt that something to be a little worried about?

 

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#3) On February 05, 2014 at 9:14 AM, TMFPencils (99.81) wrote:

Hi Zundels,

That could be a cause for concern, but keep in mind authorized shares does not mean that total shares outstanding will necessarily reach that level. It simply means that, over time, the company could issue up to 100 million shares overall. If this were to be the case, it would heavily dilute Chang's inside investment and stake in the company (which is currently over 10%). Currently the company still has less than 20 million shares outstanding. So long as growth remains strong and intact, I don't think potential share count is a major issue at this point. 

Best,
David K  

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#4) On February 05, 2014 at 3:39 PM, Zundels (79.80) wrote:

TMFPencils,

 Looks like a good company. I dont see a reason for such a huge sell off over the  last couple days. It will be interesting to watch and see what happens to them. Thanks for the heads up on this company, I will be watching it.

 Z

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#5) On February 10, 2014 at 12:59 AM, chsmrmt (< 20) wrote:

Pencils,

 What is driving the sudden growth at AFOP? From 2002 the stock went from $2 to $4.  In 2013 growth accelerated, but why and is it going to be sustained in the coming few years?

-Brandon

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