October 26, 2010
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of telecommunications equipment builder Tellabs (Nasdaq: TLAB ) plunged as much as 14% today on very heavy volume after a disappointing earnings report.
So what: The actual results of the third quarter weren't bad, roughly in line with analyst expectations overall. But management told us that sales are stalling in the fourth quarter, and gross margins will squeeze down to 44% after reaching a healthy 50% in this quarter.
Now what: On the upside, Tellabs remains more profitable than close rival Alcatel-Lucent (NYSE: ALU ) and the stock is cheaper than Cisco Systems (Nasdaq: CSCO ) on nearly any metric of valuation you choose. On the downside, the margin drop paints a dire picture of desperate pricing tactics or perhaps trouble finding customers for Tellabs' more profitable product lines. Piles of finished goods and almost no work-in-progress inventories tell the same sordid tale, and it's hard to find a positive take-away from this report.
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