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Why Emulex Shares Tanked

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 Emulex (NYSE: ELX  ) fell as much as 11% today after the networking-device maker cut its forecast for the coming quarter in its earnings report.

So what: Emulex actually bested adjusted EPS estimates of $0.22 by $0.04, but revenue growth was slow at just 5%. The company also took a $38.5 million charge related to a patent litigation settlement, giving it a GAAP net loss of $0.33 per share. For the next quarter, Q1 fiscal 2013, Emulex is guiding earnings per share of just $0.14 to $0.16 when analysts were expecting $0.21, and is also predicting a sequential decline in revenue to $118 million-$122 million. Other GAAP charges are expected to wipe out nearly all of the adjusted profit as well.

Now what: Cutting guidance is never a good sign, and neither are excessive non-cash charges for items like amortization of intangibles, stock-based compensation, royalties, and other expenses. Emulex may look cheap at a forward P/E of just 6.3, but I'd like to see consistent GAAP profits first. With six straight quarters of net losses in 2010-2011 and another one now, this company still has something to prove.

Need to stay connected with Emulex? Just add Emulex to your Watchlist.

Fool contributor Jeremy Bowman holds no positions in the companies above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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ELX.DL $0.00 Down +0.00 +0.00%
Emulex CAPS Rating: **