Time to Sell American Science & Engineering?

On Tuesday, American Science & Engineering (Nasdaq: ASEI  ) gave us the kind of earnings report most investors can only dream of receiving:

• Sales for fiscal Q3 grew by an astounding 40%, to $76.6 million over the same quarter last year.
• Profits precisely doubled to $1.28 per share.
• And once again, AS&E posted gross margins far in excess of what its rivals in the bomb-detection industry regularly pull down. Its 45.3% gross for the quarter beats out OSI Systems (Nasdaq: OSIS  ) by a good 850 basis points, and Analogic (Nasdaq: ALOG  ) by 870. It handily outpaces the 27.4% margin that more diversified United Technologies (NYSE: UTX  ) grosses, and it utterly crushes the 11.3% gross at L-3 Communications (NYSE: LLL  ) .

So … how did investors respond to AS&E's boffo news? Did they cheer? Break out the champagne? Toss ticker tape? That last celebration would have been especially appropriate, but no -- it's not how investors reacted at all. Instead, they yawned.

When good news is bad news
That's understandable, I suppose, when you consider that Wall Street had told us to expect even better revenue and profits numbers out of AS&E. As good as the company's numbers were, AS&E actually missed estimates on both counts.

As regular followers of this long-time Motley Fool Rule Breakers recommendation are surely aware, AS&E doesn't give out guidance, so it forces analysts to earn their paycheck when preparing earnings and revenue estimates. When Wall Street guesses wrong, therefore, that's Wall Street's failure -- not AS&E's.

So no, I don't blame AS&E for the "miss" … but I do blame AS&E for the things it could control last quarter and didn't. Things like the fact that AS&E has generated only $15.2 million worth of free cash flow so far this year -- less than half its reported earnings according to GAAP. Or the fact that despite receiving a PR boost from last year's bomb scares aboard UPS and FedEx transport aircraft, which should have helped the company's aircraft screening business mightily, AS&E managed to land only $63.6 million in new bookings in Q3.

That's too little to replace the revenues AS&E booked in the quarter. It means backlog has now grown by only 8% over the past year -- and it suggests that the 40% revenue growth we saw in Q3 will not recur in future quarters. Far from inducing yawns, I'd think numbers like these should make investors feel just a tiny bit nervous.