A Hidden Reason Why the Future Looks Bright for FEI

Here at The Motley Fool, I've long cautioned investors to keep a close eye on inventory levels. It's a part of my standard diligence when searching for the market's best stocks. I think a quarterly checkup can help you spot potential problems. For many companies, products that sit on the shelves too long can become big trouble. Stale inventory may be sold for lower prices, hurting profitability. In extreme cases, it may be written off completely and sent to the shredder.
Basic guidelines
In this series, I examine inventory using a simple rule of thumb: Inventory increases ought to roughly parallel revenue increases. If inventory bloats more quickly than sales grow, this might be a sign that expected sales haven't materialized.
Is the current inventory situation at FEI (Nasdaq: FEIC  ) out of line? To figure that out, start by comparing the company's figures to those from peers and competitors:

Company	TTM Revenue Growth	TTM Inventory Growth
FEI	32.7%	20.0%
Hitachi (NYSE: HIT  )	0.4%	11.6%
Cognex (Nasdaq: CGNX  )	25.6%	19.8%
FARO Technologies (Nasdaq: FARO  )	31.4%	73.6%

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. TTM = trailing 12 months.

How is FEI doing by this quick checkup? At first glan! ce, pret ty well. Trailing-12-month revenue increased 32.7%, and inventory increased 20%. Over the sequential quarterly period, the trend looks healthy. Revenue dropped 2.7%, and inventory dropped 5.5%.
Advanced inventory
I don't stop my checkup there, because the type of inventory can matter even more than the overall quantity. There's even one type of inventory bulge we sometimes like to see. You can check for it by examining the quarterly filings to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a single category.)
A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it "positive inventory divergence."
On the other hand, if we see a big increase in finished goods, that often means product isn't moving as well as expected, and it's time to hunker down with the filings and conference calls to find out why.
What's going on with the inventory at FEI? I chart the details below for both quarterly and 12-month periods.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FQ = fiscal quarter.

Let's dig into the inventory specifics. On a trailing-12-month basis, raw materials ! inventor y was the fastest-growing segment, up 42.6%. On a sequential-quarter basis, finished goods inventory was the fastest-growing segment, up 0.2%. FEI seems to be handling inventory well enough, but the individual segments don't provide a clear signal. FEI may display positive inventory divergence, suggesting that management sees increased demand on the horizon.
Foolish bottom line
When you're doing your research, remember that aggregate numbers such as inventory balances often mask situations that are more complex than they appear. Even the detailed numbers don't give us the final word. When in doubt, listen to the conference call, or contact investor relations. What at first looks like a problem may actually signal a stock that will provide the market's best returns. And what might look hunky-dory at first glance could actually be warning you to cut your losses before the rest of the Street wises up.
I run these quick inventory checks every quarter. To stay on top of the inventory story at your favorite companies, just use the handy links below to add companies to your free watchlist, and we'll deliver our latest coverage right to your inbox.

• Add FEI to My Watchlist.
• Add Hitachi to My Watchlist.
• Add Cognex to My Watchlist.
• Add FARO Technologies to My Watchlist.

The Global Debt Bubble Damns 2012

The curse of too much debt is playing havoc? with the presidential political campaign, with the threat of sovereign defaults in Europe, and with the strained financial condition of banks in Europe, the US, China, and causing a steep decline in takeover and merger activity here is the U.S.
Nations, banks and corporations are late in tackling? this problem for the reason it means deleveraging, less takeover activity, the need to pay off debt with more newer debt– and the absolute mandatory austerity, ie less growth, lower stock prices, higher unemployment all? this implies.
Example; JP Morgan CEO Jamie Dimon said publicly that JPM has $15 billion in lines of credit to Portugal, Ireland, Italy, Greece and Spain, and could under bad circumstances, lose $5 billion of that, a sum that seemed not to shake Dimon.
Example: It has been reported that BankAmerica would like to shift tens of trillions in derivative contracts from the books of its subsidiary, Merrill Lynch & Co, to the Federal Deposit Insurance Corp, so as to avoid the threat to its balance sheet from the possibility not being able to collect on these contracts. No one is confirming this need to pass off huge derivative liabilities? to the federal government.
Debt stands at the summit of the debate over what kind of capitalistic system we want. Because money cost near to nothing, deals were being done in 2006 that were bound to create huge nonperforming loans, losses for pension funds, a black eye for Wall Street– and a huge issue of the coming campaign about the money-making tactics of Republican candidate Mitt Romney.
This should trigger a rigorous debate about Wall Street’s role in the US economy– and its monied influence on the lawmakers in Washington.
Hardly anyone noticed a frank blunt speech by Carlyle founder David Rubenstein in Debai on October 15, 2008– at the very apex of the meltdown that threatened stability of gthe financial system. I wrote abo! ut it th en– and want to repeat its findings as a warning signal just as Carlyle is going to issue its shares publicly.
Credit the brainy Rubenstein for outing the rates of leverage in the financial system. Take Private Equity– the Mitt Romney issue– where most firms were dangerously borrowing $6.20 for every $1.00 in equity capital they had invested in a deal. That’s a? ratio of debt to equity of 6 to 1– meaning that if any deal lost more than 17% in value it was in effect insolvent and unless it sold assets could not pay its debt, or for that matter raise more.
Hedge funds in the fall of 2008, were borrowing on average about $ $4.00 in debt for every $1.00 in equity. The European banks like Deutsche Bank, UBS and Barclays were leveraged up 7 to 10 times more than the Private Equity Crowd– and the American investment banks were basically insolvent with debt to equity in some cases 6-7 times more than Carlyle and Blackstone. While Private Equity might have single transactions file for bankruptcy, entire banks like Lehman had to file for bankruptcy– and Merrill Lynch, Wachovia would have done so without shotgun marriages– and Citigroup and BankAmeriuca would have followed suit without federal bailouts.
Today, the stigma is in Europe. The Greek Prime Minister warned yesterday that $1 trillion? Euros must be refinanced in Europe by the end of March– and that hedge funds owned some 25% of Greece’s debt. Expect the fallout from too much debt everywhere to colr market action and part of gthe public debate about t he future of Capitalism.