BUSINESS
Viavi Solutions Inc. provides network test, monitoring, and assurance solutions for communications service providers, enterprises, network equipment manufacturers, original equipment manufacturers, government, and avionics customers in the Americas, the Asia-Pacific, Europe, the Middle East, and Africa. The company operates through three segments: Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). The NE segment offers testing solutions that access the network to perform build-out and maintenance tasks. Its solutions include instruments, software, and services to design, build, activate, certify, troubleshoot, and optimize networks; and test and measurement instrumentation for communication and safety.
INVESTMENT RATING
With future capital returns forecasted to be above the cost of capital, VIAV is expected to continue to be a major Value Builder.
Viavi Solutions has a current Value Trend Rating of F (Lowest Rating).
This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. Viavi Solutions has a poor Power Rating of 28 and a poor Appreciation Score of 19, triggering the Lowest Value Trend Rating.
Viavi Solutions’ stock is selling well above targeted value. The current stock price of $8.52 compares to targeted value 12 months forward of $6.
Viavi Solutions’ low appreciation potential results in an appreciation score of 19 (81% of the universe has greater appreciation potential.)
Viavi Solutions has a Power Rating of 28. (This poor Power Rating indicates that VIAV only has a better chance of achieving attractive investment performance over the near to intermediate term than 28% of companies in the universe.)
Factors contributing to this poor Power Rating include: the Computer Communications Equipment comparison group is currently in an unfavorable position; earnings estimate behavior for VIAV has been slightly negative recently; and recent price action has been slightly unfavorable.
INVESTMENT PROFILE
VIAV’s financial strength is average. Financial strength rating is 47.
Relative to the S&P 500 Composite, Viavi Solutions Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that VIAV is higher risk. High expected growth is a positive for VIAV. Relative weaknesses include: low historical profitability, low financial strength, low historical growth, and high earnings variability. VIAV’s valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. VIAV has unusually low market capitalization.
CURRENT SIGNALS
Viavi Solutions’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.
Viavi Solutions’ current technical position is very weak. The stock price is in a 0.9 month down move. The stock has declined 15.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Recent meaningful negative changes in fundamentals have impacted Viavi Solutions Inc (NASDAQ: VIAV): significant quarterly sales deceleration occurred, and significant quarterly earnings deceleration occurred.
The stock is currently rated F.
On 4/11/24, Viavi Solutions Inc (NASDAQ: VIAV) stock was unchanged 0.0%, closing at $8.52. However, this flat performance was accompanied by exceptionally low trading volume at 39% of normal. Relative to the market the stock has been weak over the last nine months and has declined -5.6% during the last week.
CASH FLOW
In 2023, Viavi Solutions experienced a slight decrease in cash of -$39.3 million (-7%). Sources of cash were slightly lower than uses. Cash generated from 2023 EBITDA totaled +$150.9 million. Non-operating sources contributed +$6.5 million (+4% of EBITDA). Cash taxes consumed -$30.7 million (-20% of EBITDA). Re-investment in the business amounted to -$169.1 million (-112% of EBITDA). On a net basis, debt investors furnished +$9.5 million (+6% of EBITDA) while equity investors pulled out -$6.4 million (-4% of EBITDA).
Viavi Solutions’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Viavi Solutions Peer Group. In most years, Viavi Solutions was in the top quartile and lower quartile. Currently, Viavi Solutions is at the upper quartile at +4% of EBITDA (+$6.5 million).
Viavi Solutions’ Cash Taxes, %EBITDA experienced a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Viavi Solutions Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a minor recovery.) In most years, Viavi Solutions was in the third quartile and lower quartile. Currently, Viavi Solutions is lower quartile at -20% of EBITDA (-$30.7 million).
Viavi Solutions’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Viavi Solutions Peer Group. (Since 2021 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Viavi Solutions was in the second quartile and lower quartile. Currently, Viavi Solutions is substantially below median at -112% of EBITDA (-$169.1 million).
Viavi Solutions’ Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Viavi Solutions Peer Group. In most years, Viavi Solutions was in the second quartile and top quartile. Currently, Viavi Solutions is at median at +6% of EBITDA (+$9.5 million).
Viavi Solutions’ Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Viavi Solutions Peer Group. In most years, Viavi Solutions was in the second quartile and third quartile. Currently, Viavi Solutions is slightly above median at -4% of EBITDA (-$6.4 million).
Viavi Solutions’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Viavi Solutions Peer Group. In most years, Viavi Solutions was in the top quartile and lower quartile. Currently, Viavi Solutions is slightly above median at -26% of EBITDA (-$39.3 million).
Viavi Solutions’ Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Viavi Solutions Peer Group. In most years, Viavi Solutions was in the top quartile and second quartile. Currently, Viavi Solutions is substantially above median at +48%.
PROFITABILITY
Viavi Solutions’ return on equity has improved very significantly since 2017. The current level is 0.7% versus the high of 21.0% and the low of -6.4%.
The key to the story for VIAV is a very strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors.
The productivity of Viavi Solutions’ assets remained stable over the full period 2014-2023: asset turnover has exhibited little to no overall change.
Additionally, pretax margin enjoyed a volatile overall uptrend but it experienced a very sharp decline after the 2021 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
Viavi Solutions’ return on equity is at median (0.7%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is at median (1.8%) reflecting asset turnover that is at the upper quartile (0.55X) and at median pretax margin (3.3%).
Tax “keep” rate (income tax management) is lower quartile (14.8%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is substantially above median (2.55X).
GROWTH RATES
There are no significant differences between Viavi Solutions’ longer term growth and growth in recent years.
Viavi Solutions’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been -1.8% per year.
Total asset growth has been -1.4% per year.
Annual E.P.S. growth has been -4.3% per year.
Equity growth has been -3.7% per year.
No consensus growth rate forecast is available for Viavi Solutions.
Relative to the Viavi Solutions Peer Group, Viavi Solutions’ historical growth measures are generally lower quartile. Revenue growth (-1.8%) has been substantially below median. Total asset growth (-1.4%) has been substantially below median. E.P.S. growth (-4.3%) has been lower quartile. Equity growth (-3.7%) has been lower quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Viavi Solutions’ stock price performance has been variable and significantly below market. Between June, 2013 and April, 2024, Viavi Solutions’ stock price fell -41%; relative to the market, this was a -82% loss. Significant price moves during the period: 1) January, 2016 – May, 2017: +125%; and 2) February, 2015 – January, 2016: -64%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -12.7% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of -12.7% is slightly above median relative to Viavi Solutions Inc Peer Group.
Current 5-year total return performance of -6.2% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of -6.2% relative to S&P 500 Composite, Viavi Solutions’ total return performance is substantially below median relative to Viavi Solutions Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, VIAV’s overall valuation is normal. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/assets is below median. Price/equity ratio is below median. The lowest factor, the ratio of enterprise value/revenue, is below median.
Relative to Viavi Solutions Peer Group, VIAV’s overall valuation is high. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is at the upper quartile. Ratio of enterprise value/revenue is slightly above median. Ratio of enterprise value/assets is above median. The lowest factor, the price/equity ratio, is above median.
Viavi Solutions has a very large value gap compared to the median. For VIAV to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.64X to 2.23X. If VIAV’s ratio of enterprise value/revenue were to fall to 2.23X, its stock price would be lower by $-2 to $7.
For VIAV to achieve upper quartile valuation relative to the Viavi Solutions Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.64X to 5.74X. If VIAV’s ratio of enterprise value/revenue were to rise to 5.74X, its stock price would increase by $14 from the current level of $8.52.
VALUE TARGETS
With future capital returns forecasted to be above the cost of capital, VIAV is expected to continue to be a major Value Builder.
Viavi Solutions’ current Price Target of $6 represents a -32% change from the current price of $8.52.
Viavi Solutions’ low appreciation potential results in an appreciation score of 19 (81% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 19, the low Power Rating of 28 contributes to an Value Trend Rating of F.
Viavi Solutions’ current Price Target is $6 (-4% from the 2023 Target of $6 and -32% from the 04/11/24 price of $8.52). This plateau in the Target is the result of a -4% decrease in the equity base and a -1% decrease in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a slight positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted increase in cost of equity has a slight negative impact.
PTR’s return on equity forecast is 19.0% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2015 and 2023. The current forecast is well above the 2017 low of 11%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth erratic between 2015 and 2023. The current forecast is below the 2015 peak of 2%.
PTR’s cost of equity forecast is 10.8% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2015 and 2023. The current forecast is well above the 2015 low of 5.7%.
At Viavi Solutions’ current price of $8.52, investors are placing a negative value of $-1 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 18.4% versus a cost of equity of 10.3%.
PTR’s 2025 Price Target of $6 is based on these forecasts and reflects an estimated value of existing assets of $8 and a value of future investments of $-2.
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