FARO Technologies Stock: Hold On As Headwinds Drive It Near Its Low

We believe conditions have not improved since our last article about FARO Technologies, Inc. (NASDAQ:FARO). We do not see a potential opportunity for retail value investors to jump into this stock.

The Company

The 42-year-old, Lake Mary, Florida, FARO Technologies, Inc. designs and markets software for multi-dimensional measurement, imaging, and realization solutions. Its products are used for inspecting components and assemblies, and production planning. Its products can document large-volume spaces and structures in 2D, 3D, and 4D. FARO Tech sells in Europe, the Middle East, Africa, and the Asia-Pacific.

FARO Tech products assist in surveying and construction layouts. FARO Tech imaging and measurement devices assist in public safety, law enforcement, and fire forensics to capture, analyze and visualize data in an unbiased manner. It is effective in the reconstruction of accident sites and crime scenes.

FARO Tech products create maps, scene documents, animations, and other exhibits. They preserve physical scene evidence and convert raw data into visuals for courtroom presentations, exhibits, and action plans.

The company also has products for metrology, reverse engineering, factory automation, building information modeling, enabling public safety, and other applications.

Headwinds

The stock has not done well for retail value investors. Falling numbers undergird our doubts that FARO Technologies is a worthwhile investment. FARO Tech expects its Q4 ’22 earnings report to be released on February 15, 2023. Some concerns are:

• FARO stock dived between November and June 2022 from $82 to $30.65. Seeking Alpha’s Quant Rating was screaming a strong sell. The shares closed the first week of February ’23 ~$29, -44% over the last 12 months.
• FARO operates in the hammered IT sector.
• We do not expect a fast growth stock recovery, especially for a niche business like FARO.
• The stock fell -18% last month on notice the company issued $60M convertible senior notes.
• Seeking Alpha repeatedly assigns low Factor Grades to the stock for profitability and momentum. The P/E ratio is a whopping 148.68.
• Institutions own over 99% of the shares. Hedge funds ownership has remained steady over the years but decreased by nearly 300K shares over the last quarter.
• Seeking Alpha authors rate assign a hold rating to the stock. Fewer than a half-dozen Wall Street analysts follow the stock.
• Seeking Alpha’s mood indicator, the Quant Rating wavers between strong sell, sell and hold for the past 18 months.
• FARO’s management and board leaders are relatively new arrivals; their compensation trends higher than average for similar companies despite negative company earnings.
• The electronic equipment and instruments industry is sputtering this year plagued by inflation, low-volume manufacturing, supply shortages from China’s domestic problems and trade issues, reshoring interrupting electronics deliveries, and domestic government and corporate spending priorities not aligning with FARO Technologies.

Conflicting Data

There is good news in that the stock’s short interest is 2.09% and the company has no debt. Q3 ’22 revenue rose 8% Y/Y as the nation’s economic recovery took hold. The company generated 70% of the hardware revenue last quarter from newly launched products. The company expects Q4 ’22 revenue to rise from $85.33M to +$99M and its EPS to fall between $0.25 to $0.45. However, last year’s EPS for the same quarter was $0.48. We expect the EPS to be in the mid-thirty cents range. SA expects -64.88% in earnings in FY’22 Y/Y.

FARO Tech’s Beta is 1.03. That shows the volatility of the shares is a risk to investors, preferring stability and low risk. We are hesitant to extol the revenue growth because it includes revenue generated from aggressive M&A activity.

FARO Tech gained 15 companies, 6 in the last 5 years. In 2021, FARO earlier bought HoloBuilder for $34M and GeoSLAM in 2022; management hopes GeoSLAM will open doors to FARO Tech’s products in the geospatial and mining sectors. According to their CEO in the SA transcript of the last shareholder call:

What we’ve said historically is that we would like to be in a position or we expect to be in a position where 25% of our revenue is recurring in nature,” but they are not near that yet.

Another positive is that FARO Tech’s price-to-sales ratio is 1.6x; similar companies average 2.9x. Buying shares at around $26, we consider a potentially safe bullish position. Some analysts are forecasting a $55 price target over the next 12 months. We believe the stock price will meander nearer the low $30s and might hit $40 per share. That will require consistent quarterly earnings increases. Keep in mind, this stock pays no dividend, so it offers less value in a tumultuous market.

Balance sheet data have been flat and cash flow from operations and investing turned down.

Takeaway

FARO Technologies Inc. built an attractive niche business through multi-dimensional measuring and imaging software and devices with wide applications. Revenue is growing fast through M&A. Without debt, a market cap touching $550M, and holding $48.5M in cash and equivalents, we rate FARO stock a potentially high-growth and low-risk investment. Light news coverage and few analysts covering the stock keep investor attention slim. Sometimes if the image is not for everyone, studying it carefully can offer a clearer image.