Missile Maker Falls Back to Earth

With his Sherlock Holmes-like investigative intuition, Motley FoolHidden Gems lead analyst Tom Gardner continues to unearth clues that might lead to the next super-bagger stock. Looking back at success stories has helped him develop a methodology for finding the next great company. One highlight from his study was Engineered Support Systems (Nasdaq: EASI).

From January 1990 to December 2004, Engineered Support's stock price increased 137 times (adjusting for stock splits) -- much of that in the last five years. Shares of the designer and producer of the Minuteman Missile Launcher have definitely rocketed to sub-orbital levels of late. But the company's second-quarter results appear to be bringing the stock back down to earth. In recent trading, Engineered Support's stock declined about $4, or 10%. What crashed the party?

First, it's important to point out that Engineered Support makes a lot more than missile launchers. To suggest that the sole purpose of this enterprise is the Minuteman Missile is like saying General Dynamics (NYSE: GD) only produces the Stryker assault vehicle, or LeBron "King" James only dribbles a basketball. LeBron can do a lot more with a basketball than a simple dribble, and General Dynamics knows a thing or two about the Aegis destroyer, nuclear-powered submarines, and Abrams battle tanks. Likewise, Engineered Support has its fingers in all kinds of defense-oriented delicacies, including environmental control systems, or military-ready portable heating and cooling units, to heavy-duty battery chargers, which are about 100 times larger than the charger you use for your cell phone.

So the good news is that this company has more than one expertise. The bad news is that sometimes all it takes is one miss on the tire-jump obstacle for Fluffy The Multitrick Pooch to spiral down the dog agility competition rankings. In Engineered Support's case, the trick it missed is its deployable power generation and distribution system. (Say that real fast -- or better yet, let's stick to its abbreviation of DPGDS).

The company blamed production delays associated with the system for its net income from continuing operations falling below expectations. At $20.1 million, it came up way short of the anticipated $28 million.

Further, because of the performance issues in its DPGDS units, the company now expects its full-year earnings per share (EPS) to be $2.00 to $2.03. This is lower than its original guidance of $2.09 to $2.12 per share, and well shy of analyst consensus estimates of $2.17 per share.

Despite the DPGDS hiccup, Engineered Support has a couple of big-time second-quarter highlights, such as double-digit revenue growth of 25% and a backlog that is now a record $2.1 billion. With these kinds of positives, keep a close tab on this company to see if the market continues to bring its shares down to earth. You just might find a stellar buying opportunity if the stock returns to sub-orbital heights.

You can find other great stocks before the market knows about them by reading Tom Gardner's Motley Fool Hidden Gems. Click herefor a free 30-day trial.

Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.