Market Overview

As Kanye Would Say, This Company is Cray!

Back in the 1980s, standard computers would be as large as an entire room. Nowadays, entire computers can fit into the palm of our hands. This is simply the standard, however, and physically large computers still exist. These high performance supercomputers are still prevalent and are used primarily by private companies and the government. Is there any way to tap into the supercharged power of these special breed of computers?

Cray Inc (NASDAQ: CRAY) is a small-cap company that develops, manufactures, and distributes high-performance computing mechanisms, available to customers internationally. It specializes in entire systems, but is able to adapt to clients' particular needs in any given project.

Cray's business model allows it to conform to almost any client's request. Whether the company deals with biomedical clients or engineers, it is able to facilitate their computational problems. It helps expedite discovery by way of its supercomputing products. Considering Cray's ability to tangibly add value to its clients, some investors may be wondering what, if anything, is wrong with the company.

The first problem is that Cray may not be protected from significant market fluctuations. In the face of a burgeoning European debt crisis along with US debt concerns, Cray could be affected dearly. Cray operates in a niche market, and if companies were unable to afford the supercomputing abilities that Cray offers, Cray could quickly lose customers. On the other hand, universities and certain government institutions that use Cray's capabilities may be somewhat shielded from rapid economic fluctuations, meaning that Cray could be protected by some clients.

Cray also operates in a small industry in which every added competitor could be detrimental to Cray's top-line. It also means that there is a limited amount of clientele. These concerns are warranted from a qualitative standpoint, but are they confirmed by Cray's financial statements?

Cray appears to be consistently boosting its revenues, year-over-year. It has also managed to controls costs related to revenues, increasing gross margins over time. Moreover, it has maintained research and development costs as well as marketing expenses and salaries, ultimately increasing its operating income. Lastly, it has been able to achieve profitability in 2010, as non-operating expenses like interest did not adversely affect it as severely as they did in years past.

Cray's cash flows have been extremely volatile over the last several years. In 2007 and 2009, operational cash flow was positive, while in 2008 and 2010, it was negative. The trend is not particularly attributed to net income. Rather, changes in inventory and receivables decreased cash. In 2008 and 2010, inventories increased significantly, therefore reducing the cash that could have been made had the inventories been sold. This is not a repetitive problem, but deserves to be noticed, as it may signify that the company has some trouble in consistently turning over its inventory. On the same note, the company accrued a lot of receivables in 2010. While it is positive that the company will have future cash flows from this account, it should be noted that the company may be having problems collecting money from its debtors.

Capital expenditures and acquisitions have been on and off each year, and were actually positive in 2010 as the company sold much of its investments. the company has also not issued debt or equity in recent history, and has actually paid back some of its debt in the last few years. As is expected, the company's balance sheet has been fairly volatile. While its cash pile has consistently increased, current assets have fluctuated every year. Interestingly, the Cray's property, plant, and equipment has decreased in 2010. This may or may not signal that its activities are shrinking, as it requires less facilities. Its debt situation is positive, however, as it has cut out all short-term and long-term debt. It has also stifled growth in other liability accounts. Lastly, it has managed to increase retained earnings year-over-year, incrementally adding value to its shareholders.

Cray operates in a complex niche industry. Professionals across the globe require Cray's computational abilities, and the company appears to have a positive operational trend. While there are some aspects of the company and its financial history that may not be positive for some investors, there are many strong points deserving to be considered. Investors to learn more about the company's past contracts as well as management's plans for future directions.

Cray is currently trading at about $6.30, down over 13% for the year.

ACTION ITEMS:

Bullish View:
Traders who believe that Cray operates a successful business might want to consider the following trades:

  • Long Cray by purchasing shares or call options. Cray currently appears to be close to a technical support level, so now may be a good time to buy.
  • Short another similar company, like Silicon Graphics International (NASDAQ: SGI). You could short this company to hedge a long Cray trade or to accentuate your belief that Cray will dominate the supercomputing market
  • Long an ETF like the Technology SPDR (NYSE: XLK). If a niche industry like supercomputing is doing well, technology itself will probably do well

Bearish View:
Traders who believe that Cray will not succeed in the future may consider the following positions:

  • Short Cray after it breaches the $6.10 level, which appears to be a technical support level. The next support level appears to be at about $5.65.
  • Long a competitor like IBM (NYSE: IBM), as someone bearish on Cray may believe that a large-cap competitor is more likely to garner market share.
  • Buy put options as Cray's earnings announcement comes along. The company may not be able to sustain its costs as precious metals rallied significantly in Q3 2011

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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