Foolish Forecast: American Science & Poison

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American Science & Engineering (Nasdaq: ASEI) closes the books tomorrow afternoon on what has registered so far as a lackluster fiscal 2008. Will the stock shine, or will investors whine?

What analysts say:

• Buy, sell, or waffle? Only five analysts still follow this Motley Fool Rule Breakers pick, giving it three buy ratings and a pair of holds.
• Revenue. On average, they're looking for quarterly sales to eke out a 1% rise to $46.4 million.
• Earnings. Profits are predicted to rise 8% to $0.65 per share.

What management says:
"American Science and Engineering ... announced ... that its Board of Directors has approved the adoption of a new shareholder rights plan on April 16, 2008 ... If a person or group acquires beneficial ownership of 15% or more of the then outstanding shares of the Company's Common Stock, each right would entitle its holder to purchase shares of the Company's Common Stock having a market value of two times the exercise price of the right." That's what AS&E said last month. But what does it mean?

Translating from the original legalese, what AS&E said was: "We know better than you do how much our jobs, er, that is, your shares, are worth. So if someone comes knocking, offering to buy you out for, let's say a 50% premium to your shares' market price, we're going to slam the door in his face. Potential acquirers have to offer substantially more before we're going to allow a takeover to proceed." In corporate circles, such "shareholder rights" plans are more accurately described as "poison pills," and Fools don't like the taste of 'em, not one bit.

What management does:
Why would anyone voluntarily eat something clearly labeled "poison," you ask? Maybe because their business is already withering on the vine. Sales declined 11% at AS&E last quarter. Meanwhile, profit margins earned on those sales continued their steady march down toward the cellar levels of security market rivals L-3 (NYSE: LLL), Analogic (Nasdaq: ALOG), and OSI (Nasdaq: OSIS), in that order.

Margins	9/06	12/06	3/07	6/07	9/07	12/07
Gross	47.5%	46.2%	43.4%	42.0%	40.4%	37.6%
Operating	25.2%	23.6%	21.4%	21.1%	19.8%	16.6%
Net	18.1%	15.9%	16.1%	14.8%	14.0%	12.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The most troubling aspect of AS&E's report last quarter, though, was on the balance sheet. Over there, the decline in sales gave way to a huge jump in inventories. Overall, stockpiles of unsold goods more than doubled in size, and the biggest increase came in the subset where we least like to see it: Finished goods more than septupled.

At the time, I tempered my dismay at the news by musing, "we can hope that AS&E has a bunch of contracts to execute; it has the goods in hand to fill the orders, and could book the revenue (and profits) at any moment." Since then, however, the silence at AS&E has been deafening, leading one investor on our Motley Fool Rule Breakers discussion board to ask: "Am I the only one wondering why they have not announced a single order in the past quarter?"

In an amusing twist of fate, within minutes of that post going up, AS&E announced a $14 million contract. So let me address this single wish to Rule Breakers member TheStezzer: Please post more often. I fear AS&E can use all the help it can get.

What did we expect out of AS&E last quarter, and what did we get? Find out in:

• Foolish Forecast: Inspecting American Science & Engineering
• American Science & Disclosure Issues