Online Weirdness

"Shares of payments facilitator and online banking software provider Online Resources (Nasdaq: ORCC  ) took a tumble yesterday, on no news that this Fool could discern. After all, the company doesn't report its Q3 2006 earnings report until tomorrow afternoon. Does someone know something we don't know?" -- "Foolish Forecast: The Bank on Online Resources," October 25, 2006

Last week, we learned the answer to that rumination: A resounding "perhaps." While it's impossible to say for certain why the shares tumbled pre-earnings, their price continued moving downward after the numbers came out, losing as much as 12% of their already diminished pre-earnings value over the next few days. Then, just as inexplicably, the selling wave stopped and reversed itself on Friday -- on no apparent news. (The firm's signing of First Data (NYSE: FDC  ) veteran Robert Craig to head its new Princeton eCom business, now retitled "Biller Services," happened days before the reversal.) All of which combines to win Online Resources the coveted title of "Weirdest Stock of the Week."

Why all the weirdness? There seem to be several contributing factors.

Dilution
For one, there's the company's shelf registration, discussed in the earnings release, permitting it to sell as many as 13 million shares of common stock with little advance warning. That's enough stock to dilute existing shareholders out of more than 50% of their ownership interest, and plenty reason to send a stock down in and of itself.

Define "reality"
The schizophrenic descriptions of how the company is doing also helped to destabilize the stock. On the one hand, GAAP results show 85% revenue growth resulting in an $0.11-per-share loss (contrasted with last year's $0.09 profit for the third quarter) -- which sounds just awful. On the other hand, out comes CEO Matt Lawler, who pronounces himself "very pleased with strong billpay user and transaction growth," calls the loss "expected," and chalks it up to non-cash charges for "acquisition-related expenses and the change in equity compensation and tax accounting treatment."

Reality is cash in the bank
What's the reality of Online Resources' profits? Allow me to re-introduce the cash flow statement, which shows that the firm has generated only $2 million in free cash flow so far this year. That's down nearly 75% from the $7.9 million in hard cash profits the business racked up through the first three quarters of 2005. If we assume this year's trend holds, then the company will end up with about $2.7 million in FCF over the course of the fiscal year. That gives the stock a price-to-free cash flow ratio of roughly 100:1, making the firm look entirely overpriced to this Fool.

Thus, I'm seriously considering removing my current "outperform" rating for Online Resources in Motley Fool CAPS, making this the first time I have "ended" a pick in this, our brand-new stock-evaluation service. Will I do it? And will my disenchantment with Online Resources cascade into "underperform" ratings on rivals such as Digital Insight (Nasdaq: DGIN  ) , Corillian (Nasdaq: CORI  ) , CheckFree (Nasdaq: CKFR  ) , and Marshall & Ilsley (NYSE: MI  ) ? There's one way to find out: Join more than 12,000 other stock-rating investors in CAPS, and check out my portfolio. If I end the pick, you'll see it there first.

First Data is a Motley Fool Inside Value pick.

Fool contributor Rich Smith owns shares of Corillian. The Fool's disclosure policy always outperforms.