Company Overview

Clearfield, Inc. (“CLFD”) was founded in 1979 and today describes their operations as follows:

We design, manufacture, and distribute fiber protection, fiber management, and fiber delivery solutions to enable rapid and cost-effective fiber-fed deployment throughout the broadband service provider space primarily across North America. Our “fiber to anywhere” platform serves the unique requirements of Community Broadband customers (Tier 2 and 3 telco carriers, utilities, municipalities, and alternative carriers), Multiple System Operators (cable television), Large Regional Service Providers (ILEC operating a multi-state network with more than 500,000 subscribers), National Carriers (wireline/wireless national telco carriers (Tier 1)), and International customers (primarily Europe, Canada, Mexico, and Caribbean Markets). ^[3]

The Company has the following two operating and reportable segments:

Clearfield Operating Segment: This segment focuses on providing fiber delivery products, fiber management, and fiber protection, all of which aim to accelerate the turn-up of fiber-based networks in businesses, network infrastructure in the wireline and wireless access network(s), and residential homes. This allows service providers to build fiber networks faster, meet service delivery demands, and align build costs with take rates.
Nestor Cables Operating Segment: This segment focuses on manufacturing and providing fiber optic and copper telecommunication cables and equipment for distribution to building contractors, electric companies, industrial companies, network owners, and telecommunication operators. The segment has two types of production processes, the process of making cable in its Finland facility and the finished assembly portion of its business performed in Estonia.

This Security Issue came to our attention at the price of approximately 24.02 during late-2023, with drafting of this Piece beginning soon after. At the time it initially piqued our interest for several reasons, including:

The Company’s low P/E ratio
The Company’s low P/BV ratio
The Company’s ‘P/E * P/BV’ figure being less than 22.5
The Company’s current ratio
The Company’s earnings consistency and general increase

Our Suspected Valuation at First Glance: Possibly ‘Silver’ or ‘Gold’

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings ^{[3 – 23]}.

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from CLFD’s most recently published SEC filing (10-Q) ^[3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) ^[1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 11.01 in accordance with Table 2 – 3, and Table 2 – 4 above, whilst the best, average and worst-case scenarios are 10.00, 9.61 and 8.94 respectively, all of which are above the minimum recommended figure of 1.5. The Issue also passes the acid test in all four instances.

The Company has no long-term debt to have less than 110% of the net current asset value.

The Company has not demonstrated any losses over the last decade and it is our opinion that the earnings have been fairly consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers.

The Company does not pay any dividends on their common stock.

The Company’s most recent annual earnings were larger than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2015) we can see that over the latest fiscal decade, the EPS have increase by approximately 578%.

The discernible tangible equity per share is 15.93 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be 13.56, 12.38 and 11.15, respectively. The current price of 28.45 is greater than 120% of all of these values.

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” ^[2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There was one main point we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following point was to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Selective Auditing

The Company and/or their independent auditor appear to pick and choose when they want the auditor to express an opinion on the effectiveness of the Company’s internal control over financial reporting. From the 2009 10-K Form (and prior) they did not do so as the preceding list demonstrates:

“We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion” ^{[27, 28, 29, 30]}.
“We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion” ^[25].

We began from 2009 but earlier years could have been included as like we said this practice existed prior to that. Then from the 2014 annual report onwards things began to change and an opinion was expressed:

“We have audited the accompanying balance sheet of Clearfield, Inc. as of September 30, 2014, and the related statements of earnings, shareholders’ equity and cash flows for the year then ended. We also have audited Clearfield, Inc.’s internal control over financial reporting as of September 30, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (1992 framework). These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits” ^[23].
“We have audited the accompanying balance sheets of Clearfield, Inc. as of September 30, 2015 and 2014, and the related statements of earnings, shareholders’ equity and cash flows for the years then ended. We also have audited Clearfield, Inc.’s internal control over financial reporting as of September 30, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits” ^[21].
“We have audited the accompanying balance sheets of Clearfield, Inc. as of September 30, 2016 and 2015, and the related statements of earnings, shareholders’ equity and cash flows for each of the years in the three-year period ended September 30, 2016. We also have audited Clearfield, Inc.’s internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). The company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits” ^[19].
“We have audited the accompanying balance sheets of Clearfield, Inc. as of September 30, 2017 and 2016, and the related statements of earnings, shareholders’ equity and cash flows for each of the years in the three-year period ended September 30, 2017. We also have audited Clearfield, Inc.’s internal control over financial reporting as of September 30, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). The company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits” ^[17].
“We have audited the accompanying balance sheets of Clearfield, Inc. (the ‘Company’) as of September 30, 2018 and 2017, the related statements of earnings, shareholders’ equity and cash flows, for each of the three years in the period ended September 30, 2018, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)” ^[15].
“We have audited the accompanying balance sheets of Clearfield, Inc. (the ‘Company’) as of September 30, 2019 and 2018, the related statements of earnings, shareholders’ equity and cash flows, for each of the three years in the period ended September 30, 2019, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)” ^[13].

Abruptly however the sentiment changed with the independent auditors then reminding shareholders that no audit of the Company’s internal control over financial reporting is required, and the auditors were not expressing an opinion on this matter and thus Shareholders were provided with the following two quotes (for fiscal years 2020 and 2021):

“We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion” ^[11].
“We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion” ^[9].

And then lo and behold, from the 2022 10-K Filing the ideology sashayed back as shown by the following two quotes (for fiscal years 2022 and 2023):

“We have audited the accompanying consolidated balance sheets of Clearfield, Inc. (the ‘Company’) as of September 30, 2022 and 2021, the related consolidated statements of earnings, shareholders’ equity, and cash flows, for each of the three years in the period ended September 30, 2022, and the related notes (collectively referred to as the ‘consolidated financial statements’). We also have audited the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)” ^[7].
“We have audited the accompanying consolidated balance sheets of Clearfield, Inc. (the ‘Company’) as of September 30, 2023 and 2022, the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended September 30, 2023, and the related notes (collectively referred to as the ‘consolidated financial statements’). We also have audited the Company’s internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)” ^[5].

Such caprice especially considering where it exists contextually is obnoxious. It almost looks as if the independent auditors are picking and choosing when they decide to audit and comment on the Company’s internal control over financial reporting as the contradictory attitudes from one time period to another are rather blatant. Some years they remind readers of their lack of obligation to comment and others they happily provide the same commentary. To us, this arouses suspicion, leading us to wonder if for the years no opinion was expressed, was there was an issue with the financial reporting hence why that option was taken? Of course this is speculation at this point (although some may regard it as “conjecture”). Regardless, we definitely think it should be thoroughly and ardently queried with Management.

On a side note, the excerpt below was present in the 2022 10-K Form:

The Company has excluded the acquisition of Nestor Cables LTD, which closed on July 26, 2022, from their management report on internal controls over financial reporting as of September 30, 2022. This exclusion is supported by Securities and Exchange Commission guidance for an acquired business internal control assessment for a period of up to one year from the date of acquisition. Our audit of internal controls over financial reporting of the Company also excludes any consideration for Nestor Cables LTD internal control over financial reporting. ^[7]

Normally we would not think much of such an exclusion as they are standard practice, but considering what we discussed above we are now marginally sceptical. Hence why it is important for Management to always appear trustworthy as everything then gets called into question. Your take on everything should be your own, however.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

The Company may currently be in a business cycle trough.
Concerning customers concerning risk the 2023 10-K Form had the following to say – “For the fiscal year ended September 30, 2023, the Company had one customer that comprised 16% of net sales. This customer is a distributor. For the fiscal year ended September 30, 2022, the Company had one customer that comprised 14% of net sales. This customer was a distributor. For the fiscal year ended September 30, 2021, the Company had two customers that comprised a combined 28% of net sales” ^[5]. This percentage was higher earlier on in the decade and should it elevate again we believe the customer’s identities should be disclosed. As far as supplier risk concentrations go, the 2023 10-K Form had the following to say – “We rely on single-source suppliers, which could cause delays, increases in costs, or prevent us from completing customer orders, all of which could materially harm our business…We purchase critical components for our products, including injected molded parts, various cabling, optical components, and connectors from third parties, some of whom are single- or limited-source suppliers” ^[5]; and we wonder how much of CLFD’s products are subject to this risk.
The Company is very conservatively capitalized so may not make for an interesting speculative purchase in this regard.
The Company does not frequently estimate what they anticipate any financial metrics to be the following year, say capital expenditures for example so we cannot comment on their reliability in this regard.
We do not here suspect any corporate pyramiding.
The 10-K and 10-Q Filing’s say that “the consolidated financial statements include the accounts of Clearfield, Inc. and its wholly owned subsidiaries” ^{[3, 5]}, so there are no need for other stakeholder concerns in say a liquidation type scenario.
We believe the depreciation and amortization charges are accounted for in the ‘selling, general and administrative’ portion of the ‘operating expenses’ because it has been previously inferred e.g., “selling, general and administrative expense for fiscal year 2019 was $27,501,000…an increase of $197,000 in depreciation and amortization expense” ^[13]. Concerning the depreciation methodology “depreciation is provided in amounts sufficient to relate the cost of assets to operations over their estimated useful lives” ^{[5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27, 28, 29, 30]}, which we suspect means that the assets are depreciated using the straight-line method although it was not clearly stated. The provided estimated useful lives of the assets are as follows: ‘Equipment’ is 3-5 years since the 2022 10-K Filing, prior to which it was 3-7 years; ‘Vehicles’ is three years, which has been consistent throughout our sampled 10-K Forms; ‘Leasehold improvements’ is either 7-10 years or the life of lease, which has also been consistent throughout our sampled 10-K Forms.
We would not say the Company has a history of atypical special charges or non-recurring charges etc., however some matters have occurred:
1. “During the year ended September 30, 2017, the Company incurred an impairment charge on long-lived assets of $643,604 which was charged to selling, general, and administrative expenses. This impairment was related to the cancellation of an enterprise resource planning software implementation” ^[13].
2. “These were partially offset by a decrease of $2,087,000 in legal expenses, mainly due to the expense in fiscal year 2018 associated with the defense of the patent infringement litigation including a one-time payment of $850,000 in settlement of that litigation” ^[13].
3. “The Company incurred approximately $1,600,000 in legal, professional, and other costs related to the acquisition which were accounted for as selling, general and administrative expenses when incurred” ^[7].
The Company has completed a couple of notable acquisition over the last decade but we don’t think they are overly dependent on this strategy for future growth, although it does seem like the clearer year-over-year increases in net income have immediately followed these acquisitions. For their 2018 acquisition, a fair amount was paid for intangibles but that was not the case for the 2022 acquisition; and the 2018 acquisition was funded “from the Company’s cash operating account” ^[13] but for the 2022 acquisition “the purchase price was funded from a draw of $16.7 million under the Company’s revolving line of credit” ^[5]. Both acquisitions seemed relevant to the core operations at the time and neither involved common share offerings of CLFD as part of the consideration.
The Company has a stock repurchase program under which they repurchase shares in the open market. We believe the shares are cancelled but this specific detail is lacking.
The Company’s comprehensive income typically approximates to the net income on a consistent basis and until only recently they were the exact same value.
Up until the 2018 10-K Form, the inventory was stated at the lower of cost or market, prior to which it was stated at the “lower of cost or net realizable value” ^{[5, 7, 9, 11, 13, 15]}.
The latest balance sheet had both “other current assets” and “other” assets (embedded in the non-current “other assets”) that we could not incorporate into our valuations because a full breakdown was not provided.
The effective tax rates do not vary much year-over-year and currently approximately the official statutory rates. The latest 10-K Form had the following to say about carryforwards – “As of September 30, 2023, and 2022, the Company had no U.S. federal, state or Estonian net operating loss (‘NOL’) carryforwards. As of September 30, 2023, and September 30, 2022 there is a Finnish NOL of $1,000 and $4,000, respectively” ^[5].
From what we can see there are no large or concerning payments due in the next year or so.
From what we can see there has been no decline in the value of the current or total assets in recent years causing any need for concern.
Both ‘research and development’ and ‘advertising’ costs have gone up in recent years as demonstrated in the following two quotes: i) “Research and development costs amounted to $3,115,000, $895,000 and $1,243,000 for the years ended September 30, 2023, 2022, and 2021, respectively, and are charged to expense when incurred” ^[5]; and ii) “Advertising costs amounted to $609,000, $537,000, and $436,000 for the years ended September 30, 2023, 2022, and 2021, respectively, and are charged to expense when incurred” ^[5]. We’d like to hear Management’s take on whether or not the increased expenditure is proving to be financially fruitful.
We are not sure if the Company has any insurance on their products or services as the main reference to insurance is that of “key person life insurance on Ms. Beranek and Mr. Hill” ^{[5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27, 28]}.
The 10-K Forms always say “there are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations” ^{[5, 7, 9, 11, 13, 15]} but they don’t say there are none at all. There was a proceeding mentioned in the 2017 annual report and there have been mentions of legal fees incurred e.g., “these were partially offset by a decrease of $2,087,000 in legal expenses, mainly due to the expense in fiscal year 2018 associated with the defense of the patent infringement litigation including a one-time payment of $850,000 in settlement of that litigation” ^[13].
Prior to the 2014 10-K Filing the Company identified as a “smaller reporting company”, then from the 2014-2017 10-K Filing it solely identified as an “accelerated filer”, after which it identified as both an “accelerated filer” and a “smaller reporting company” (i.e., 2018 and 2019), then from the 2020 – 2021 10-K Filing it identified as both a “non-accelerated filer” and a “non-accelerated filer”, and since the 2022 10-K Filing the Company has identified as a “large accelerated filer”.
There are conflicting numbers for the equity compensation plan for fiscal year 2022 in the 10-K and DEF 14A Forms. For the sake of conservatism we opted for the figures presented in the 2022 10-K Form as opposed to the 2023 DEF 14A Form as the former had a higher number. It is not clear to us why the numbers are different considering they both say “the following table describes shares of our common stock that are available on September 30, 2022, for purchase under outstanding stock-based awards, or reserved for issuance under stock-based awards or other rights that may be granted in the future, under our equity compensation plans” ^{[6, 7]}. Clarity on this could be sought with Management.
There is a whole ‘Risks Relating to Our Common Stock’ section in Item 1A. of the annual report that seems very unnecessary.
The Company has a number of assets located outside of the U.S. so there are some currency fluctuation risk such i.e., “As of September 30, 2023, and 2022, the Company had property, plant, and equipment with a net book value of $7,003,000, and $4,213,000, respectively, located in Mexico. In addition, as of September 30, 2023, and 2022, the Company had property, plant, and equipment with a net book value of $6,703,000, and $6,916,000, respectively, located in Finland and $660,000, and $280,000, respectively, located in Estonia. All other property, plant, and equipment is located within the United States” ^[5].
There has been mention of a capital raise of approximately $130,000,000 completed in the first quarter of fiscal 2023, but not much details on this have been provided.

Points we feel may be considered negative

We would not say the operations of the Company are easy for the layman to comprehend.
This Company operates in a fast-paced technological environment.
We would say this is a relatively small company in terms of consolidated financials.
There is currently a large institutional ownership percentage of the common shares outstanding (61.19% at the time of the Piece’s posting ^[31^]).
The Company currently does not pay any cash dividends on their common stock, with the following sentiment being reiterated over the years – “We have never paid cash dividends on our common stock. We currently intend to retain any earnings for use in our operations, continued organic growth, and potential future strategic transactions, as well as execution of the repurchase program described below, and do not intend in the foreseeable future to pay cash dividends on our common stock” ^[5].
In the last two DEF 14A Forms CLFD have mentioned paying compensation to their “non-executive officer employee Andre Hill, son of Chief Operating Officer John Hill and son-in -law of Chief Executive Officer Cheryl Beranek” ^{[4, 6]}, and elaborate that “the majority of which was derived from earned sales commissions” ^{[4, 6]}.
We found some negative Management elements:
1. There does not appear to be a mandatory retirement age for the Board of Directors.
2. The Company mentions shareholder engagement that appears to only target their “largest institutional shareholders” ^{[4, 6, 8]}, with no mention of the smallest shareholders. They also mention that some of their shareholders decline and we’re curious as to why.
3. The CEO is involved in c-level executive compensatory decisions.
4. The Company has a habit of using of non-GAAP measures when NEO determining compensation, and “the Compensation Committee retained the discretion to include or exclude items from each of the performance metrics and to determine the achievement of the performance goals for the purposes of calculating incentive” ^[4].
5. The approval ratings of the say-on-pay proposals are rather erratic: “The say-on-pay proposal presented at our 2019 Annual Meeting of Shareholders received 83.2% approval by our shareholders” ^[12]; “the say-on-pay proposal presented at our 2020 Annual Meeting of Shareholders received 64.5% approval by our shareholders” ^[10]; “the say-on-pay proposal presented at our 2021 Annual Meeting of Shareholders received 62.2% approval by our shareholders” ^[8]; “the say-on pay proposal presented at our 2022 Annual Meeting of Shareholders received 90% approval by our shareholders” ^[6]; “the say-on-pay proposal presented at our 2023 Annual Meeting of Shareholders received 84% approval by our shareholders” ^[4].

Points we feel may be considered positive

The Company was founded in the 70s thus has stood the test of time.
The Company profited during both years of the 2008-2009 economic downturn ^[30].
There is no history of stock splits ^[32] and no notable excessive stock dilution.
There have been more year-over-year increases in cash and cash equivalents than there have been decreases over the latest fiscal decade.
The current asset value exceeds that of all liabilities.
There was no long-term debt on the latest balance sheet.

Possible Questions for CLFD’s Approximate 290 Stockholders to Consider, Investigate and/or Raise with Management

Why do the independent auditors inconsistently express an opinion on the Company’s internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))? Is this under anybody’s say-so and if so, who is behind this? Can the practice be consistent going forward?
The Nestor Cables Operating Segment posted a net loss for fiscal 2022. Was that year a loss as it was only just beginning operations with the Business?
The Company mentions their measures of quality such as First Pass Yield (“FPY”) and On-Time Delivery (“OTD”) but they do not say what the numbers are. Can this be provided going forward?
Can more details on the recently mentioned transformative multi-year strategy plan called LEAP be provided, e.g., how long it is expected to successfully implement, the associated costs, and the anticipated savings (if any) in the long run?
The 2023 10-K Form said the following – “Nestor Cables has historically had a fiscal year end of December 31 and reported its results under Finnish Accounting Standards. Accordingly, it is impracticable to disclose the revenue and earnings of the combined entity as though the business combination occurred as of the beginning of the comparable prior year periods due to the differing basis of accounting and reporting periods of the entities requiring assumptions about management’s intent that cannot be independently substantiated. In addition, these disclosures would require significant estimates that are not possible to reliably establish in order to distinguish objective information that provides evidence of circumstances that existed on the dates at which those amounts would have been recognized, measured and disclosed and would have been available when the financial statements for that prior period were issued” ^[5]. Whilst it may not be worth the effort to do so, surely not being able to do so for the reasons provided indicates a bit of incompetence on somebody’s part assuming it is true?
Does the Business have any insurance policies on their products and services?
How much of the Company’s products/services sold rely on single-source suppliers?
Whenever a customer contributes more than 10% of the Company’s sales can their identity be disclosed?
Both research & development and advertising costs have gone up in recent years as demonstrated in the following two quotes: i) “Research and development costs amounted to $3,115,000, $895,000 and $1,243,000 for the years ended September 30, 2023, 2022, and 2021, respectively, and are charged to expense when incurred” ^[5]; and ii) “Advertising costs amounted to $609,000, $537,000, and $436,000 for the years ended September 30, 2023, 2022, and 2021, respectively, and are charged to expense when incurred” ^[5]. Is the Business confident this expenditure is yielding a good return on investment?
When and why did the Company start investing in securities and under whose guidance is this practice being headed up under? Is any of this on account of the Director who has been on the board since 2008 and is detailed as a ‘private investor’? If so, can a history of said investor’s results be provided? If it is being overlooked by somebody else can their investment history be provided?
Why did the Company only recently elucidate their net investment income numbers? What has it been historically?
Going forward can a full compressive breakdown of all ‘other’ assets (current and/or non-current) be provided in all 10-K and 10-Q Filings?
Can the depreciation and amortization charges be delineated on the income statement?
Can exact estimated useful lives of the depreciated assets be provided as opposed to ranges?
Why were the estimated useful lives of the Company’s ‘equipment’ changed from 3-5 years, to 3-7 years in the 2022 10-K Form?
Can CLFD always provide details of legal proceedings even if they don’t think they will be material?
Can the Company provide some type of estimate of what they expect for say the ‘capital expenditure’ costs to be the following financial year?
When discussing certain properties and leases, the Business says “the renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option” ^{[5, 7]}. Isn’t this a little short sighted and presumptuous?
Are the shares bought under the share repurchase plan cancelled? Can their fate always be described in the 10-K Forms?
Why does CLFD refuse to pay cash dividends on their common stock considering they have been profitable for over a decade? Do Shareholders not deserve some compensation?
The Company has recently mentioned a “capital raise of approximately $130,000,000 completed in the” ^{[4, 5]} first quarter of fiscal 2023. Can more details on this be provided?
Why have interest rates on loans been so high as was showcased in the following example – “On April 27, 2022, the Company entered into a loan agreement and a security agreement with a bank that provides the Company with a $40,000,000 revolving line of credit that is secured by certain of the Company’s U.S. assets…As of September 30, 2023, the interest rate was 7.18%” ^[5]?
There are conflicting equity compensation plan numbers for fiscal year 2022 in the 10-K and DEF 14A Forms. Both say “the following table describes shares of our common stock that are available on September 30, 2022, for purchase under outstanding stock-based awards, or reserved for issuance under stock-based awards or other rights that may be granted in the future, under our equity compensation plans” ^{[6, 7]} but then provide differing information. Which one was accurate if any, and why did the two forms have different numbers to begin with?
The 2024 DEF 14A Form detailed the salary increases such that “for fiscal 2023, base salaries were set at the following amounts: Ms. Beranek, $425,000 (an increase of 13.5%); Mr. Herzog, $340,000 (an increase of 36.9%); and Mr. Hill, $425,000 (an increase of 13.5%)” ^[4]. Whilst the Company has remained profitable, were such large percentage increases really dignified?
Why do Management think the approval ratings of the say-on-pay proposals vary so much year-after-year?
The 2024 proxy statement said this when discussing the 2022 Stock Compensation Plan (the “2022 Plan”) – “The 2022 Plan was presented to our shareholders at the 2023 Annual Meeting of Shareholders and received 97% approval. The say-on pay proposal presented at our 2023 Annual Meeting of Shareholders received 84% approval” ^[4]. Why do Management think the plan received 97% approval, but then the say-on pay proposal received an 84% approval rating?
The Business mentions shareholder engagement that appears to only target their “largest institutional shareholders” ^{[4, 6, 8]}. How do they reach out to the smaller shareholders and if they do not, why not?
Is there a mandatory retirement age for the Board of Directors and if not, why not?
How did Ronald G. Roth come to own so many outstanding shares of CLFD?
Was any Director or EO a founder or co-founder of the Company, or a descendant of such? Whilst it has been said “the Compensation Committee believes this is appropriate because the Chief Operating Officer has a greater scope of duties at our company than typical for the position and is also a named inventor on Clearfield’s products” ^{[4, 6]}, there is still a little ambiguity on this matter.

Valuations

The price of this Security Issue at the time of this Piece’s publication is 28.45. Using our most recent three-year average of the diluted EPS (2.20) as opposed to the most recent EPS figure (1.93) reduced the P/E ratio from 14.81 to 12.98; and using our discernible tangible equity value per share (15.93) as opposed to the stated book value per share (17.80, in accordance with Table 2 – 2) has increased the P/BV ratio from 1.61 to 1.79. With that in mind and considering current federal interest rates (5.5% at the time of writing), the current price does not appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” ^[2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. ^[2]

Taking our most recent three-year average value of 2.20 for diluted EPS and our stated discernible tangible equity value per share of 15.93, and multiplying the corresponding P/E and P/BV ratios of 12.98 and 1.79 respectively, we get a figure of 23.27, which is above Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 28.09).

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering both our adjustments and the Company’s financial changes since then:

The Company’s low P/E ratio – still somewhat valid
The Company’s low P/BV ratio – still somewhat valid
The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
The Company’s current ratio – still valid
The Company’s earnings consistency and general increase – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently overvalued on account of its current and previous quantitative showing.

Our Valuation: Lead⁺

This Security Issue done okay in our ‘Initial Discussions Regarding the Company’s Financials’ section, not the best and not the worst. The suspicions we have around the internal control of financial reporting are very negative but if they turn out to be unnecessary then there is not much else bad to say here, however if the opposite is true and the suspicions have a solid rooting that the whole matter is egregious. We’ve valued the Issue as if there is a 50/50 chance (which admittedly did take away from the Valuation a little bit). At this point in time for this Issue to have reached the next valuation of ‘Bronze’, it would likely have had to come in at a pricing point of approximately 23-27.

At this point in time and all matters here considered, this is a stock pick we would likely follow and would give some consideration towards adding to a stock portfolio given the correct price.

References

Graham, B., Dodd, D.L., Security Analysis, (6^th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
CLFD’s 1^st 2024 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/796505/000117184324000584/clfd20231231_10q.htm
CLFD’s 2024 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184324000212/clfd20240103_def14a.htm
CLFD’s 2023 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184323007342/clfd20230930_10k.htm
CLFD’s 2023 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184323000186/def14a_010623.htm
CLFD’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184322007645/clfd20220930_10k.htm
CLFD’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184322000229/def14a_11222.htm
CLFD’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184321007797/clfd20210930_10k.htm
CLFD’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184321000224/def14a_011221.htm
CLFD’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184320007946/f10k_111020p.htm
CLFD’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184320000226/def14a_011420.htm
CLFD’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184319007586/f10k_111419p.htm
CLFD’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184319000182/def14a_010719.htm
CLFD’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184318007950/f10k_111418p.htm
CLFD’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184318000252/def14a_010918.htm
CLFD’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184317007043/f10k_111517p.htm
CLFD’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184317000168/def14a_011017.htm
CLFD’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184316013350/f10k_112216p.htm
CLFD’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184316007211/def14a_011516.htm
CLFD’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184315006549/gff10k_112515p.htm
CLFD’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184315000162/def14a_010915.htm
CLFD’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184314005701/f10k_112614.htm
CLFD’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184314000124/def14a_011014.htm
CLFD’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184313004762/f10k_112113.htm
CLFD’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/796505/000117184313000125/def14a_010313.htm
CLFD’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184312004374/f10k_113012.htm
CLFD’s 2011 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184311003637/f10k_113011.htm
CLFD’s 2010 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000117184310002478/f10k_111810.htm
CLFD’s 2009 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/796505/000115752309008672/a6123837.htm
https://www.gurufocus.com/stock/CLFD/ownership
https://www.stocksplithistory.com/clfd/?l=1

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended that same year, typically in the calendar month of September, i.e., any mention of the ‘2019 10-K Filing’ or ‘2019 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended September 2019. The Filings are usually published a couple of months later, that same calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Form/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2020 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2019 10-K Filing; usually published not too soon after the 10-K Filing (typically a couple of calendar month(s) relative to the 10-K Filing’s filing date).

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V