Is There A Reason This Is So Cheap?

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past few months, market-watchers have been turned on to an often-overlooked company that has dramatically improved its balance sheet and produced some eye-popping stock movements. Teleconferencing firm ClearOne (NASDAQ: CLRO) has seen its stock nearly double in value since the beginning of 2013 alongside some encouraging financial news. 

Despite these positive movements, the company's P/E ratio remains severely depressed. Relative to two of its closest competitors, ClearOne appears to be getting short shift from investors who may have yet to buy into its story.

Given the general consensus that the teleconferencing sector is a growth industry that offers tremendous opportunity for well-run companies, one would expect ClearOne to be an investor darling. Those who believe in the industry's long-term prospects would do well to compare this company alongside its peers to determine whether it is being unfairly punished. ClearOne has a number of public and private competitors in the space, this article will focus on Polycom (NASDAQ: PLCM) and Citrix (NASDAQ: CTXS).

ClearOne produces audiovisual equipment for commercial and institutional clients that regularly engage in teleconferencing. The company's products include microphones and "sound reinforcement" tools that are designed to pick up low-volume noises and background chatter. Outside of the boardroom, many of ClearOne's products have additional applications in the healthcare and education fields. The company's offerings generally use secure IP connections to interface with other systems. After showing decent but unspectacular annual growth in 2010 and 2011, the company nearly quadrupled its operating income for 2012. In its most recent quarter, ClearOne posted eye-popping quarterly growth numbers and now offers a return on equity of more than 50 percent. For the most recent full year, its revenues were about $46.4 million. Polycom is a firm with a 2012 loss of $35.6 million on about $1.4 billion revenues, 96.5 percent drop in quarterly earnings growth, and balance sheet does not appear to be as robust as that of ClearOne. Citrix has had more success. The company has marketed its products to principals at small and medium-sized businesses and been rewarded with solid profitability and a moderate growth: In 2012, Citrix earned $352.6 million on about $2.6 billion gross revenues. Most of Citrix's teleconferencing activities are accomplished through cloud-based systems like GoToMeeting, GoToWebinar and GoToTraining.

ClearOne: Low P/E, Eye-Popping Quarterly Revenue Growth

The most notable observance about ClearOne's stock is its shockingly low P/E ratio, recently reading in the neighborhood of 2.98. For comparison, Polycom's forward P/E sits near 13. At 18.95, Citrix's is even more impressive. At the very least, it seems curious that a company that enjoyed a 57 percent profit margin in 2012 should have a P/E ratio that's 75 percent lower than that of its closest competitor. To make things even more surreal, Polycom actually lost money last year.

Two other aspects of ClearOne's balance sheet bear noting. First, the company experienced eye-popping quarterly revenue growth of over 1,630 percent for the most recent quarter. Secondly, the company has no debt and a healthy $55.5 million cash reserve. This works out to a cash balance of over $6 per share and should be particularly heartening for value investors.

Finally, ClearOne's stock price has skyrocketing during the past quarter. After trading in a tight range between $3.50 and $4.50 per share for much of 2012, ClearOne bounced from about $4 to nearly $7 in January of 2013. In late March, it took another leg up and came to rest near $8.50 per share. Despite this 55 percent updraft, ClearOne clearly remains undervalued.

What's the Best Play?

In light of the stock's recent price movements, it appears that ClearOne is finally drawing the attention of some value-seeking investors; however it is clear that the stock remains undervalued by traditional metrics. A lack of liquidity could play a role here: ClearOne's average daily trading volumes remain firmly below 100,000 shares. Indeed, the company only has 9.1 million outstanding shares, and more than 3 million of these are tied up without contributing to its total float. With just 0.3 percent of the company's total shares remaining short, a short squeeze that pushes the company's stock price up even further seems out of the question. That being said its balance sheet is strong enough to support plenty of organic growth.

In sum, ClearOne appears to be undervalued relative to its peers. Whereas Citrix is a diversified company that looks like a solid investment on paper, Polycom has experienced some troubling weakness and may not be a good bet for conservative investors. Those who wish to gain some leverage in the teleconferencing space would do well to look at ClearOne at these levels. For other investment ideas in areas outside of this industry, click here.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Polycom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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