Since reporting Q4 and full-year fiscal 2014 earnings Thursday night, shares of X-ray bomb detector company American Science & Engineering (NASDAQ: ASEI) have gone on a tear — one interrupted, but only briefly, by the holiday weekend. With the stock up more than 5% from pre-earnings levels, it’s clear that investors were pleased with AS&E’s results. But why? The numbers Let’s find out. Last week, AS&E reported:

• quarterly sales growth of 55% in comparison to last year’s Q4 — $65.6 million.
• a five-fold increase in profits per diluted share for the quarter — $0.50.
• more muted full-year performance of $190.3 million in sales (up 2% versus fiscal 2013), and $1.91 per share in full-year earnings (down 8%).

So right there on the surface, you can see that what investors were reacting to last week was AS&E’s Q4 performance — not its full-year results, which were pretty dismal. This could be a warning sign for investors looking to earn additional profits on the stock, however. Why? Simply because, historically speaking, AS&E has always been a company notorious for “lumpy” earnings. Some quarters, the company does very well. Others, not so well. And the fact that AS&E famously refuses to provide financial guidance to the analysts who track its performance means it’s very hard to tell whether any given quarter will be one of the “good ones” until the news has come out. Trouble in the offing? One possible clue to AS&E’s future, however, is its “book-to-bill” ratio — basically, how much revenue the company “billed” in a quarter, versus the value of new orders “booked” for later work. In this regard, AS&E’s Q4 news seems somewhat less optimistic than the headline revenue and earnings growth figures would suggest. On the one hand, yes, the $60.8 million in bookings that AS&E took in in Q4 was much better than the mere $8.8 million in bookings from last year’s Q4. On the other hand, though, $60.8 million in new orders is only enough to replace about 93% of revenues billed in this year’s Q4. This suggests that revenues, up in Q4, could decline again in Q1. Valuation matters This, in turn, could mean bad things for AS&E shareholders, because of the stock’s evident overvaluation. AS&E stock currently sells for 36 times earnings. But the company generates substantially more free cash flow (cash profits) than it’s allowed to report as GAAP earnings (accounting profits). In fact, last year, free cash flow at the firm amounted to $30.7 million, or more than twice reported earnings. So even if the stock is priced at 36 times trailing earnings today, AS&E isn’t quite as expensive as it looks — but it’s still pretty expensive. Valued on free cash, AS&E shares sell for about 18 times the free cash flow generated last year. That may not sound too bad, but free cash flow at the firm grew only 11% year-over-year in fiscal 2014. And long-term, analysts are projecting only about 4% annual growth in profits at the company, according to data from S&P Capital IQ. Whichever growth figure you prefer to base your valuation on, 11% or 4%, growth still seems too slow to justify AS&E’s multiples to earnings and free cash flow. The upshot With AS&E currently paying a dividend yield of 2.9%, these shares may be worth owning for the dividend — but only if you don’t mind taking on the risk that your principal investment, in the value of the shares themselves, may decline over time. As a growth stock, or as a value stock, AS&E simply isn’t enough of a bargain to justify this risk.     The Better Bet If you’re looking for dividends, you should take a look at this report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see The Motley Fool’s  free report on these stocks, just click here now.

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