- Often it is right to be circumspect
- Sometimes shares get over-punished
Both stocks this week operate in structural growth market backdrops, but both face issues that are bearing on their ratings. While caution on hardware player Calnex Solutions (CLX) feels well founded, the valuation of JD Sports Fashion (JD) seems to be pricing too much risk and a re-rating, not necessarily imminent, is overdue.
Calnex is a hardware and software business that allows network operators and applications providers to pre-test and monitor their internet-based traffic. Customers materially over-ordered new equipment in 2020/2021, leading to an order drought in 2022/2023. The resulting drop in revenues collided with higher operational costs and profits dropped to zero. Long-term demand for such network equipment is strong and multi-faceted, but is it hard to predict the pace and timing of improving demand for Calnex. However, when it does that, operational gearing swings back in its favour. When this occurs remains unclear and is made more difficult as Calnex has split from its leading distributor (Spirent) who drove 70 per cent of sales and Spirent itself has since been acquired by one of Calnex’s rivals. Wait long enough and Calnex should see a geared rebound in EPS, but there are too many ‘what ifs’.
