Limited Analyst Coverage Can Have Benefits

A CRIME-SCENE PHOTOGRAPHER needs to capture as many details as possible before evidence is spoiled. A contractor might wish to plan work on a building whose rooms have been altered over the years without its blueprints being updated. A videogame maker wants a car race through midtown Manhattan to look like the real thing. These things and many more are accomplished with variations on a single tool: the portable, three-dimensional laser scanner.

Laser scanners work up close or from hundreds of feet away. They record quickly and accurately, taking in three times the number of points on today's highest-definition televisions in a single minute while noticing details that measure just a few ten-thousandths of an inch. They can map mines, buildings and roads for the first time or inspect tires and airplane parts over and over, comparing images with computer-drawn designs.

One thing that's difficult to measure for now is the size of the market for such lasers. Non-portable measuring machines, which are typically built for a single use, bring in sales of about $1 billion a year. Portable, software-driven devices, which can be adapted for a long list of tasks and used by manufacturers at the point of production, create new uses for themselves, and so might be good for $2 to $3 billion in yearly sales, reckon Wall Street analysts.

Faro Technologies (FARO), based in Lake Mary, Fla., specializes in 3-D laser scanners. Its sales are seen rising 19% to $228 million this year. It has spent dearly in recent years to manufacture and market its products more quickly than competitors, which has crimped profitability. Each dollar in sales over the past year became a dime in operating profit, barely better than the broad market's average. Management hopes that with the sales momentum it is building it will eventually expand that dime to 18 to 25 cents on the dollar.

That won't happen this year. Orders in Europe and Asia have been strong, but customers in North America have proved cautious on the economy. Faro, which doesn't issue earnings guidance, barely grew profits in its first quarter and missed Wall Street estimates by a wide margin. Shares lost a fifth of their value on May 1, the day of the report. Second-quarter profits are forecast to have held flat. Full-year growth is seen at 6%, suggesting a second-half recovery. Next year's outlook is more optimistic, calling for 33% profit growth.

The soft patch Faro has hit has put its stock at 17 times forecast 2008 earnings, near the low end of its historic range. That presents an opportunity to own it cheaply and hold out for growth to resume. After all, the stock's recent tumble notwithstanding, it has tripled in value in three years.

Faro turned up recently on a search for companies that are covered by few analysts despite strong growth prospects, modestly priced shares and profits that, on average, have come in better than expected over the past four quarters. (The company, prone to swings in the timing of orders, missed big in two quarters and beat even bigger in two others.) Have a look at all eight companies that made the cut if you like. To run the search yourself anytime, use SmartMoney's stock screener and the full list of search criteria.

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