These three companies didn't live up to Mr. Market's expectations last week. 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.
Whether the target was set by the company's own management, by Wall Street analysts, or by the market at large, that miss can have serious consequences, causing share prices to suffer in a very real way.
Today, the pharmacist looks a little sick, the rustproofing is corroded, and let's just forget about memory.
Wrong prescription?
First up is drugstore behemoth Walgreen (NYSE: WAG), a company unaccustomed to missing its targets. But it delivered just $0.40 per share in earnings -- Wall Street wanted $0.47 per share -- despite 10% higher revenues than last year.
Management pointed to higher operating expenses and a recent increase in low-margin generic drug consumption at the expense of high-markup brand-name alternatives. That explanation didn't sit well with the average investor, and Walgreen's share price dropped more than 18% the next day.
Market-leading Walgreen's two largest rivals have been catching up by acquisition lately. CVS (NYSE: CVS) went up the food chain with a $21 billion deal for drug distributor CareMark, while Rite Aid (NYSE: RAD) paid $3.4 billion for 1,850 new storefronts under the Brooks and Eckerd banners.
And if that load of industry upheaval wasn't enough, consider the eagerness of big-box retailers to steal market share from the specialist drug and convenience stores, plus the coming wave of expiring high-profile branded drug patents. It looks like Walgreen needs to think long and hard about its overall strategy right now. Coasting on prior glories just ain't enough anymore.
Chemically yours
Next in our batting order: chemical-coatings specialist and Income Investor pick RPM International (NYSE: RPM). The company reported 10% higher earnings year over year, and 11% stronger earnings at $68.3 million, but its EPS of $0.53 still fell two pennies short of the average analyst forecast.
Management said that the results were in line with internal expectations, despite "a soft retail market for our consumer segment and continued raw material price pressures for the industrial segment."
RPM was able to raise its end-user prices to compensate for the material cost increase, which led to higher gross margins. Along with a strong 7% organic revenue growth that shows some pricing power, it inspires hope that future rough patches might be handled the same way without scaring away the customers.
Even after an 8% drop last week, the stock is up some 20% over the last 52 weeks, and that doesn't even include the 3% dividend yield. With strong pricing power and organic growth, there's no reason why this dip couldn't be a tip-top buy-in opportunity.
Star Wars? Here?
Computer memory maker SMART Modular Technologies (Nasdaq: SMOD) ends this week's underperformer cavalcade. Its $0.17 per share in non-GAAP earnings fell $0.03 short of the Wall Street target.
That's life in the DRAM memory space, where average selling prices appear stuck in the Death Star garbage compressor, without an R2 unit around to stop the squeeze. Rival Micron Technology (NYSE: MU) felt the pressure, too, reporting a GAAP loss last week.
SMART CEO Iain McKenzie said that the street prices in this fourth quarter fell 65% from the first-quarter figure -- but he could see some trends working in his company's favor, too. Solid-state hard drives have started to make their presence felt in the market, and SMART offers its own line of those storage devices. Micron doesn't.
One sea change that should help the entire memory industry is the virtualization movement, where platforms like VMware's (NYSE: VMW) eponymous flagship product help data-center managers squeeze more efficient computing power out of smaller raised-floor footprints. That drives sales of larger servers with more memory.
I still remember buying half a megabyte of extra memory for my Commodore Amiga in the early '90s for about $250. That's $400 in today's dollars, which would easily buy four gigabytes of server memory today -- about 8,000 times as much memory for your buck.
In other words, the pricing squeeze is not new, and it's not likely to end anytime soon. SMART's strategy of offering new, innovative products and searching for new ways to increase unit sales looks about right to me.
Time to go home
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 week, and we'll take a look at another batch of mishaps and disappointments. It'll be fun and educational.
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