The Motley Fool

3 Reasons to Take a Look at EXFO

By: Chris Lau

EXFO (TSX:EXF, NASDAQ:EXFO) is in the business of providing testing solutions for network operators and equipment manufacturers – and business is good.  EXFO recently announced an inspection probe used for inspecting fiber in networks – the kind of technology that is primed to benefit from the rollout of 4G/LTE.

Though the stock is up by more than 40% since June, is there still time to consider EXFO as an investment? Here are 3 items to consider:

1)      New product releases

The company recently released 2 new products, bringing the total to 15 for the fiscal year.  One of these products, TravelHawk Pro shows significant promise for growth as it helps customers troubleshoot network problems on a 4G/LTE system. The product was selected by three of the world’s top-five LTE operators.

Another product, Brix Mobile Agent, was released at the end of the last fiscal year. This software product lets customers measure the QoE (“Quality of Experience”) of their 3G/4G cellular networks.

2)      Growth strategy

EXFO aims to be a market leader in the global telecom test and service assurance industry in three years. Demand for bandwidth is expanding and EXFO’s test equipment is appealing because it helps network operators reduce their costs. The company has stated three objectives to help measure its success:

  1. Grow sales at a compounded annual growth rate (CAGR) of at least 25%
  2. Generate gross margin of 65%
  3. Increase EBITDA by at least 30% (CAGR)

3)      Risks

Typical for telecom service equipment providers, EXFO could suffer from macroeconomic risks. In 2012, sales dropped because of tough market conditions, due mostly to the European debt crisis. Overall sales declined by 3.1% in fiscal 2013, but EXFO still managed to grow sales in its Physical-Layer solutions segment. This is an area where the company provides optical and copper testing products to its customers.

Bottom Line

Even with the recent trading activity in its shares, EXFO is still a relatively undiscovered potential gem.  Once more investors begin to realize the strong tailwind at EXFO’s back given the strong environment in which it operates, further gains could be in store.

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Fool contributor Chris Lau does not own shares of any companies mentioned.  The Motley Fool has no positions in the stocks mentioned above at this time.

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