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No. of Recommendations: 10
When you have a miserable quarter the year before, that will make earnings look like it exploded. Estimates were about $0.07 and they missed big time. Even if they hypothetically hit earnings last year that would still be 70% growth, but often companies just becoming profitable again will exhibit high growth rates until the financials start to settle down.

If you look at sales over the last 10 years, "erratic" is the only thing that comes to mind. They have had difficulty sustaining sales from year to year. I understand seasonality but if the market is not saturated (and I believe it is not) the ride shouldn't be this bumpy. The recent rise in profit has more to do with a $10M decrease in SG&A a couple years ago more than it has to do with rising sales. This year should hit about $90M in sales, which is only about a 3% increase from last year. There is only so much you can do to decrease costs; in the long run you will always need top line growth to sustain bottom line growth.

Over the last year and a half, CNXS has had negatives almost every quarter except the last which was outstanding. Last quarter they pretty much blew out expectations and it shot up. But one point doesn't make a trend and I wouldn't dare spend a premium on CNXS. But at $9-10, it makes for an interesting value play with $4 and change in cash, very little cap ex and a product that sells itself (an assumption I make since I have never seen an advertizement) so maintaining continuing operations is not difficult and they should be able to maintain sales and earnings at this level. They have also done an excellent job with the financials overall and reduced the diluted share count significantly during the late 90s for very favorable prices. But in the long run to be priced for growth they have to prove they can sustain it.

There is also going to be a lot of short term risk from here. They have stated that they would be interested in acquisition, and that will likely result in emptying their coffers. They did an excellent job in purchasing the nasal strip brand but not so well in the sales/marketing arena so I have mixed feelings about this. This doesn't come as a surprise to me though, and they should probably be applauded for showing patience to this point as well. Also, they have run up 50% when the rest of the market has been stale, and I expect if something doesn't look good the market will beat down the stock.

However, if you do a DCF and plug in growth rates that *should* be attainable (5 year growth of 10%, terminal growth of 4%) I come up with valuations in the low 20s, but the long term problem is at some point CNXS will have to prove they can grow revenues at that level. If last quarter is a sign of things to come then today's prices will prove to be a bargain, but I'd like to see some sustained success before paying for growth.

I'd like to see CNXS succeed as much as anyone but I don't think they are ready to be priced for growth. Hopefully I am proved wrong. But this is some of the reasons why a lot of people think CNXS has "had their run" despite all the positives.
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