Why FARO Technologies Shares Plunged

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 FARO Technologies (Nasdaq: FARO  ) , a manufacturer of 3-D measurement and imaging systems for the manufacturing, industrial, and construction sectors, fell off a cliff by as much as much as 20% after reporting disappointing second-quarter earnings results.

So what: For the quarter, FARO reported a profit of $0.21 per share, down from $0.38 in the year-ago quarter, as sales decreased 6% to $60.7 million. Unfortunately for current shareholders, Wall Street had been looking for FARO to report EPS of $0.35, resulting in an earnings miss of 40% -- it's second-straight quarter of badly missing expectations. FARO blamed economic weakness and order delays, particularly in Europe, for its weak results despite the introduction of new instrumentation. Further, gross margin fell 290 basis points to 53.2% as expenses to roll out new products rose, and older products were reduced in price.

Now what: To me, this sounds like the perfect storm of bad news. FARO has pledged to control its costs and explore all avenues to grow during this period of weak economic growth, but I see no reason why it couldn't head even lower. Following two quarter of very large EPS misses, there's nothing in this report to signify that its revenue decline will abate anytime soon -- especially in Europe. I suggest breaking out the yellow caution tape and staying far away from FARO until we see genuine revenue growth again.

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