TEAM (Nasdaq: TISI) used to consistently produce really attractive earnings-per-share growth rates. Its income statements and the rest of its financials helped TEAM stack up favorably against its industrial-sector micro-cap counterparts. With earnings having increased by an average of 37% annually over the past 11 years, its past earnings growth wasn't exactly characteristic of more mature companies in the sector, including General Electric (NYSE: GE), United Technologies (NYSE: UTX), and 3M (NYSE: MMM).
Lately, though, TEAM's performance has cooled off in investors' eyes. Management announced quarterly results on April Fool's Day, but an earnings drop of 24% to $2.2 million compared with last year's third quarter was no joke. EPS fell from $0.15 to $0.11.
What happened to EPS is a textbook example of how a high degree of total leverage can backfire. Sales decreased by only 4% for the quarter, but the company's leverage magnified the impact of that decrease on the bottom line. Margins also contracted. But given the circumstances, TEAM has done a pretty good job of adjusting to the weak economy.
It's not that TEAM's performance is terrible now. The specialty industrial services that it provides are used extensively in the refining, petrochemical, power, pipeline, and other heavy industries where things can get very hot. Its expertise is in maintaining and installing high-temperature and high-pressure piping systems and vessels.
Instead, TEAM's earning power is shrinking because of macroeconomic factors beyond its control, and it's unfortunate that this happened while the company still has a significant amount of long-term debt.
Although fiscal 2009 may see little or no growth over the levels of previous years, the fact that it's nearly over means the end of what has proved to be -- for many market participants -- truly an annus horribilis. However, unless demand completely dries up -- which it won't -- TEAM should have no problem satisfying obligations to its debtholders. Every company faces setbacks at one point or another, and this is just one of those times for TEAM and many others.
Once under way, the increase in productivity required to bring the global economy out of recession, in my opinion, will be the catalyst that has an extreme makeover effect on TEAM and eventually brings it back to its former status as a drop-dead knockout company. As for when that will happen, though, your guess is as good as mine.
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