Dot Hill Systems (HILL – Snapshot Report) is one of those small cap stocks that I bet you haven’t even heard of. If that is the case, you are in luck as I am going review this stock the morning that it is set to report earnings. HILL is a Zacks Rank #2 (Buy) and has an “A” Growth Style Score and today it is the Bull of the Day.
Small Cap, Small Visibility
Out of sight, out of mind is a theme that I see repeated time and again on small cap stocks. Let’s face it, if you don’t use their product, there is a good chance as an investor that you have never heard of this stock. Hopefully this article will get you to look under the hood of some of the other small caps out there like HILL.
Dot Hill Systems makes a range of software and hardware storage systems for the entry and mid-range storage markets. Its storage solutions consist of integrated hardware, firmware, and software products. Dot Hill Systems Corp. was founded in 1988 and is headquartered in Longmont, Colorado.
At a recent analyst day meeting, management positioned the company as being the storage company that is showing growth and profitability. This company showed a telling slide of the bifurcation of the storage industry, listing competitors that have “profit without growth” and another group that was showing “growth without profit.”
One other slide that stopped me in my tracks was their “three simple objectives” slide. A lot of times companies have similar stories or products, but at the end of the day, you have to see execution. Without a proven history of executions, executives are just selling smoke, but that is clearly not the case with HILL.
This slide speaks to things that aggressive growth investors need to see. Revenue growth? Check. Diversification of revenues? Check. Profitability expanding? Check. Now let’s go over the prerequisite ideas in all my Bulls of the Day.
The earnings history for HILL is filled with hits and misses. More recently, the company has topped the Zacks Consensus Estimate in three of the last six quarters. Over that time there was also one miss and two times where the company met expectations.
The December 2014 quarter, which was reported on 3/5/15 was one of the beats. Revenues of $68M were in line with consensus, but there was another beat on the bottom line. The company reported EPS of $0.12 vs $0.10 consensus for a 20% positive earnings surprise.
The company is reporting earnings again today. This article was written well before the report and will not be updated. HILL typically sees a little seasonal weakness in the first half of the year. The company is expected to show revenues of $60M and the Zacks Consensus Earnings Estimate is calling for $0.04.
The 2015 Zacks Consensus Estimate was as high as $0.27 back in July of last year. The estimate ticked down a penny in August and stayed there until another penny came off the top in November. Estimate dropped to $0.21 in January of this year and then bottomed out at $0.20 in March after an earnings report. Since that time, analysts have become more positive on HILL’s outlook and the Zacks Consensus Estimate has risen back to $0.22.
The 2016 Zacks Consensus Estimate is another story. Being a smaller company analysts generally do not have very good long term visibility into future profits. The 2016 Zacks Consensus Estimate was $0.44 from June of last year until February of this year, and at that point, models were likely updated. The optimism was tempered down and the 2016 number is at $0.31.
These estimates show an implied earnings growth rate of 56%.
The valuation picture for HILL is a little mixed as it has high PE multiples but also shows the stock trading at a discount to a few metrics that most investors follow. The 50x trailing PE is rich, but we normally want to buy a stock for future earnings, not what it has done in the past. The 30x forward earnings is also high, but not as lofty. The company sports a strong price to book multiple of 6x when the industry average is 3.7x, so a little more premium there as well. The discount comes in terms of price to sales, as HILL trades at 1.8x vs the 2.2 industry average for that metric.
Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color coded lines represents analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #2 (Buy) we see that estimates are moving higher.
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Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.
He also runs the newest Zacks Investor service Stocks Under $10, where he looks for long term gains from low priced stocks. In each of these services, subscribers are sent buy and sell alerts when the editor is adding a new name or removing and old one.