FARO Flames Out

Factory measurement specialist FARO Technologies (Nasdaq: FARO  ) is belly-flopping from the high board today. It's down a whopping 28.8%.

The news is that earnings for the most recently completed quarter will be far short of the $0.19 to $0.27 that the company guided. They'll be more like $0.03 to $0.05, in fact. Investors didn't like it, even though revenue, up 21.4%, will land at the high end of guidance.

The company had a laundry list of expenses that were higher than expected: commissions, personnel, marketing, legal fees, taxes, and the ramp-up for the new Singapore headquarters. Cost control looks to be out of control.

OK, here's the spin: The company is optimistic that it can leverage its "growth-related expenses into improved operating margins by the second half of 2006." That's corporate-speak for "Expect a few more quarters where earnings performance won't meet expectations."

The ill winds were blowing strong in August when I reviewed the company's second-quarter results. An increase in the sales force and legal costs were identified as reasons for hammered operating margins. But the company expected the seasonally strong second half of the year to provide the oomph needed to keep earnings within guidance.

Feel Foolish commentator Seth Jayson lost faith in the company in December and removed FARO from his Lazy Portfolio. Good move, Seth! The stock is setting a new 52-week low today.

FARO is a small company with A-list manufacturing clients in various large industries. There's Toyota (NYSE: TM  ) in automobiles, Boeing (NYSE: BA  ) in aerospace, Hewlett-Packard (NYSE: HPQ  ) in consumer goods, General Electric (NYSE: GE  ) in electrical generation, and Deere (NYSE: DE  ) in heavy equipment. And that's just a sampling of a very extensive client list.

What the company has going for it is a rapid increase in sales. But until the company can prove that it is mending its operating margins, the stock (in this observer's opinion) is going to underperform the market.

FARO Technologies is aMotley Fool Hidden Gemsrecommendation.

Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Clickhereto see The Motley Fool's disclosure policy.


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