Bear of the Day: IXIA (XXIA) - Bear of the Day

Although the stock has sold off heavily so far this year, it still doesn't look like a value at 26x next year's earnings.

IXIA provides converged Internet Protocol IP network test and network visibility solutions for a variety of network equipment manufacturers, service providers, enterprises, and government agencies. According to IXIA, the company "develops amazing products so its customers can connect the world".

Sales by product type in the second quarter were as follows:

Hardware: 62%
Software: 11%
Warranty: 24%
Other: 3%

Approximately 40% of total revenue came from outside of the United States in Q2.

Second Quarter Results

IXIA delivered disappointing second quarter results on September 15. Adjusted earnings per share (but including stock-based compensation) came in at -$0.02, which was 2 cents below the Zacks Consensus Estimate. It was down from adjusted earnings per share of +$0.12 in the same quarter last year.

Total revenues declined 2% year-over-year to $109.5 million despite $13.3 million in revenue from the Net Optics acquisition in December 2013. It was also well below the consensus of $122.0 million. Sales to its two largest customers - AT&T and Cisco - fell 35% year-over-year to $18.3 million, or 16.7% of total revenues.

Through the first half of 2014, operating cash flow was down 79% year-over-year to $10.8 million.

Estimates Falling

Following weak second quarter results, analysts revised their estimates significantly lower for both 2014 and 2015, as you can see in the following chart:

This sent the stock to a Zacks Rank #5 (Strong Sell).

Premium Valuation

While shares of IXIA have sold off significantly so far this year, the valuation picture just doesn't look very compelling. The stock trades around 26x the current 2015 consensus, which is a significant premium to the industry median of 13x. And the company's enterprise value to cash flow ratio of 21 is also a significant premium to the industry median of 8.

IXIA also sports a negative tangible book value.

The Bottom Line

With falling revenues, falling earnings estimates and premium valuation, investors should avoid IXIA for now.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

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