Shares of Natus Medical (Nasdaq: BABY ) -- a tiny maker of diagnostic and treatment equipment for newborns, a David in an industry dominated by Goliath-like Tyco (NYSE: TYC ) , GE (NYSE: GE ) , and Phillips (NYSE: PHG ) -- got spanked bad during yesterday's trading session.
Now, most pundits -- I'm thinking of TheStreet.com and briefing.com here -- seem to attribute the market's temper tantrum Natus' having "missed estimates" by a penny. The consensus of the nine analysts who follow the stock was that Natus would earn $0.08 per share, but instead it reported an unlucky $0.07. However, when the market mavens wander, you can trust noted value investor and longtime Natus shareholder David Nierenberg to put his finger on the real problem.
Chiming in on the conference call, Nierenberg first praised Natus CEO Jim Hawkins for guaranteeing revenues "to grow every single quarter" throughout 2007, and then he got to the point. (Here I'm quoting from a transcript excerpt prepared by Motley Fool Hidden Gems member ultimatespinach.) Nierenberg put Hawkins on the hot seat: "I recall when you joined the company, you absolutely were the cost-cutting buzz saw. For those people who may be concerned seeing the increase in operating costs in this quarter, perhaps relative to their expectations, would you like to repeat the pledge so that everybody understands that Jim Hawkins is a zealous cost-cutter still today?"
Apparently not recognizing the softball, Hawkins proceeded to bunt: "We're certainly focused on that," he said, and "we certainly have a plan to do that." But he added the caveat that "we made the decision with the increased revenues to do some things that benefit us long-term." My translation: "Well, we'll do our best, but please don't hold me to that."
By now, you're probably wondering what all the fuss was about, right? Well here it is: Natus grew its revenues 40% year over year, thanks largely to new revenue streams from its Deltamed and Olympic acquisitions. Problem is, Natus spent 54% more on research and development this quarter than it did a year ago, and it nearly doubled its general and administrative spending -- far outstripping sales growth and compressing margins in the process.
Admittedly, Hawkins defended the increased spending by saying: "The strength in our top-line growth gave us the confidence to invest additional resources toward building infrastructure to support our long-term growth plans." And yes, the firm's raising of revenue guidance for the year supports that argument. But by leaving earnings guidance at the previously stated level of $0.49 to $0.52 per share, it implied that the higher "infrastructure" spending isn't going away anytime soon. And that, dear Fools, is why the stock is down, and why the natives are restless this morning.
More nursery tales available in:
Natus Medical is a
Motley Fool Hidden Gems
"Watch List" stock. Check out Hidden Gems free for 30 days.
Fool contributor Rich Smith doesn't own stock in any company named above.
RSS Headlines
Fool UK