It happens to every company sooner or later: Wall Street sets a mark for quarterly earnings, and the company misses that goal. Sometimes an earnings stumble is a signal to sell, but digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down. Today, we're heading to Finland for an icy dip with your
cell phone maker, back to Illinois to look at some rusty bulldozers, and finally down to sunny California, where a memory maker feels forgotten.
Some Koskenkorva with that perkele?
OK, Nokia (NYSE: NOK ) doesn't make every handset in the world, but that quip a sentence ago stood a decent chance of hitting home. And sales were brisk this quarter, too, to the tune of $12.7 billion, or 20% above the year-ago figure. But the sales improvement rode a wave of lower selling prices, with the average handset going for $117. Last year, a Nokia phone cost $129 on average. The lower price point brought with it lower margins, and earnings dipped 4% to $1.06 billion. EPS came in a penny below expectations at $0.29.
Management pinned the blame on slow uptake of newer GSM-standard phones, with tough price competition from rival phone manufacturers like Motorola (NYSE: MOT ) and Sony Ericsson. Across the Swedish-Finnish border, Ericsson (Nasdaq: ERIC ) is grabbing wireless infrastructure market share hand over fist, particularly in the developing nations where Nokia is selling so many low-margin handsets.
There's still plenty of life left in the Finnish giant, plenty of innovation and opportunity left to explore. But Nokia is in the middle of a technology shift from CDMA to GSM standards, and is having trouble convincing consumers of the need for the new paradigm. Until management solves that marketing dilemma, earnings will suffer -- even if sales won't. I'd expect another couple of slow quarters before any serious turnaround could be reasonably expected to happen. In other words, the shares look a bit cheaper after the drop these earnings gave them, but there could be even better buying opportunities ahead.
Immovable object vs. resistible force
Let's move on to heavy machinery maker Caterpillar (NYSE: CAT ) , a heavyweight on the construction site as well as in the stock market. Unless you spent last week on a remote beach in the Caribbean (if so, welcome back!), you've heard all about the Cat dragging Dow Jones back below the 12,000 mark thanks to a disappointing outlook.
First things first: Earnings of $1.14 per share were well below analyst forecasts of $1.35 per share. A 21% year-over-year increase wasn't good enough. Just like Nokia, Caterpillar beat revenue expectations with sales of $10.52 billion -- up 17% over last year. (Click here for a full numbers breakdown.)
$0.08 of the earnings shortfall can be attributed to a $70 million legal settlement with truck maker Navistar (NYSE: NAV ) . Some of the issues settled stretched back as far as 2001, and the two companies came out of the tussle with crosswise supply agreements on truck engines and remanufactured machinery parts.
That item still leaves $0.13 per share, or about $100 million of the shortfall, to be explained by higher-than-anticipated manufacturing costs and the like. And the company sees a macroeconomic slowdown next year that should lead to lower demand for Caterpillar's products. But management is carrying on undeterred, with a focus on achieving its 2010 goals. Next year may be rough, but "after the 2007 pause, we expect continued solid growth through the end of the decade," says CEO Jim Owens.
In other words, Caterpillar is for you if your investment horizon goes beyond the next few quarters and into the next decade. Even if earnings shrink a bit, Caterpillar has a solid income stream and massive cash flows. Management feels confident enough in the company's future to carry on with a generous share repurchase program, as well as a 20% dividend boost earlier this year. It's hard to find anything fundamentally wrong here.
That bring us to flash memory manufacturer Spansion (Nasdaq: SPSN ) , our last underperformer this week. The Fujitsu and Advanced Micro Devices (NYSE: AMD ) joint venture, only recently spun off from under AMD's wing, is still running in the red with a $0.17 net loss per share in the latest quarter. Analysts were hoping for a smaller $0.10-per-share loss, but either way, it's better than the $0.85 per share the company would have reported last year. Revenues fell short as well, with a 31% year-on improvement to $675 million, while Wall Street wanted $682 million of sales.
CEO Bertrand Cambou thinks his company can produce its first-ever quarterly profit for its next report, and operational earnings have shown steady improvement for six straight quarters. Last year, gross margins were 14%, and now they're up to 21%. That's despite unexpectedly low chip yields during the quarter, apparently the result of substandard materials delivered by one of Spansion's suppliers. The company also just retooled another fabrication facility to produce Spansion's proprietary, high-density MirrorBit memory, with all the short-term financial pain that entailed. The process enables higher efficiency in the future, as each raw wafer can produce nearly twice the amount of memory with MirrorBit technology compared to plain old flash.
Selling flash memory is no walk in the park, though, with scores of manufacturers and an ongoing supply glut putting pressure on selling prices. The consumer is the real winner in that war, as everything from flash memory cards and digital media players to digital cameras and high-end cell phones comes down in price, and MirrorBit efficiencies are really required if Spansion hopes to make any money these days.
The bottom line is that these fancy new manufacturing technologies aren't the second coming of sliced bread, but rather a necessity in a tough operating environment. Every memory maker has its own trick up its sleeve, and it's a no-holds-barred, bare-knuckle fight. Place your bets accordingly, but only after doing your due diligence. Your humble narrator is staying out of this race altogether.
And ... cut!
Some of these underperformers are victims of larger circumstances, while others might have only themselves to blame. It's up to you to decide which down-on-their-luck companies should be able to pull themselves up by the bootstraps, and which really are stuck in the mud. Come back next Monday, and we'll take a look at another batch of mishaps and disappointments. It'll be fun and educational.
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Fool contributorAnders Bylundholds no position in the companies discussed this week, but his cell phone is a low-end Nokia. The Fool has adisclosurepolicy, and you cansee his current holdingsfor yourself.