3 Earnings Reports That Caught My Attention Last Week

With three-quarters of the year now in the books, I can't help but point out that the majority of reports up until now have been better than expected. With so many companies reporting during the weeks that comprise earnings season, it's easy for some earnings reports to fall through the cracks.

Each week this year, I've taken a look at three companies that could be worth further research after either beating or missing their profit expectations. Today, we'll take a gander at three more companies that reported earnings last week. They may have slid under your radar, but they deserve a look.

Company

Consensus EPS

Reported EPS

Surprise

Nike (NYSE: NKE  )

$1.12

$1.23

10%

Red Hat (NYSE: RHT  )

$0.29

$0.28

(3%)

Sealy (NYSE: ZZ  )

$0.03

$0

N/A

Source: Yahoo! Finance. N/A = not applicable.

Nike
Nike may have put dissenters in their place by handily beating Wall Street's EPS projections in the first quarter, but the shoe giant looks to be far from healthy at the moment.

Don't get me wrong -- the prospects for Nike over the long term remain intact, with industry-leading ambassadors and a global brand recognition rivaled by few companies. But there are distinct warnings in Nike's report that demonstrate that the rare fourth-quarter earnings miss may not be a one-time event.

Gross-margin contraction is my immediate concern. Gross margin fell 80 basis points in the quarter to 43.5% primarily because of rising labor and material costs, but also because consumers are opting for lower-margin shoes. Ugg brand maker Deckers Outdoor (Nasdaq: DECK  ) is having similar problems with its consumers and has had to cut prices in order to keep product moving and avoid an even further pinch from rising sheepskin prices.

As with Deckers, the health of Europe is a concern for Nike. Europe's woes are unlikely to be resolved anytime in the next couple of years, which means other emerging-market countries (like those in Asia) could get flooded with competition, hurting everyone's margins in the end.

I'm still very optimistic on Nike over the long term, but don't count out the possibility of more near-term pain.

Red Hat
Red Hat found itself decisively in the red last week after disappointing investors with second-quarter results that fell shy of Wall Street's EPS expectations by $0.01. Higher operating expenses were the primary cause of the shortfall, but there are still plenty of reasons to be excited about Red Hat's future.

To begin with, Red Hat is positioning itself to be a leader in virtualization, cloud-computing, and data storage -- three areas expected to bring in $241 billion in annual revenue by 2020, according to Cisco Systems' estimates. Just as intriguing is Red Hat's open-source software platform, which allows users to download its software for free and upgrade to select specific features that fit their business model. This "freemium" to premium upgrade leads to little turnover and steady recurring revenue. As we saw in the second quarter, subscription revenue rose 17%, confirming that this trend is well intact. Finally, Red Hat's CEO, Jim Whitehurst, is someone investors can believe in.

My advice would be not to count out Red Hat just because it slightly lowered its fiscal 2013 outlook, but rather look at this slight dip as a possible buying opportunity.

Sealy
Tempur-Pedic International
's (NYSE: TPX  ) $228.6 million purchase of Sealy earlier this week is a bit bittersweet, as I proclaimed Sealy as one of my three picks under $3 that could double. With this purchase, Sealy agreed to sell itself for just 20% more than my January prediction.

What's worth noting is that Sealy, despite missing the consensus estimate by $0.03, actually grew sales by 9.4%, with U.S. sales jumping 11.2%. Sealy had been doing a pretty good job at lowering its debt relative to EBITDA and had been utilizing price increases as well as an aggressive marketing budget to drive sales. In short, Sealy was finally close to flipping to the other side of the mattress but sold out too cheaply, in my opinion, to Tempur-Pedic.

However, Sealy's loss is Tempur-Pedic's gain! The deal is expected to boost earnings immediately and should allow Tempur-Pedic to be able to better take on its rivals with a stronger product portfolio. I'm disappointed Sealy is being purchased so cheaply, but this could be a reason to take another look at Tempur-Pedic.

Foolish roundup
Sometimes an earnings beat or miss isn't as cut-and-dried as it appears. I've given my two cents on what's next for each of these companies -- now it's your turn to sound off. Share your thoughts in the comments section below and consider adding these stocks to your free and personalized Watchlist.

  • Add Nike to My Watchlist.
  • Add Red Hat to My Watchlist.
  • Add Sealy to My Watchlist.

Don't let Nike's earnings dampen your opinion of the retail sector. In our latest special report, our analysts at Motley Fool Stock Advisor outline three companies ready to rule retail. You can find out the identity of these three companies -- and why our analysts are so excited about them -- by clicking here to get your copy of this free report.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Cisco Systems and Tempur-Pedic International. Motley Fool newsletter services have recommended buying shares of Nike and Deckers Outdoor, as well as creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that always exceeds expectations.


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