Why FARO Technologies Shares Plunged

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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.

Craving more input? Start by adding FARO Technologies to your free and personalized watchlist so you can keep up on the latest news with the company.

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.

Motley Fool newsletter services have recommended buying shares of FARO Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest.

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