These three companies just 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.
Rising from the ashes?
University of Phoenix parent Apollo Group (Nasdaq: APOL ) is our first underperformer this week. The education provider reported a pro forma net profit of $0.41 per share on $693 million in revenue, lagging Wall Street expectations of $0.52 per share and $704 million, respectively.
Total student enrollment increased nearly 11% over the year-ago period, and sales grew by 14%. But promotional expenses increased even faster, at a 21% clip, mainly because of pay raises for enrollment counselors. In the earnings call, President Brian Muller noted that "the skill set of the team is a major asset," and the raises are putting some bite behind that bark.
Expect human resources to remain a focal point for Apollo, then. Of course, the end that justifies these expensive means is to attract more students, and then pull them through to graduation. From that perspective, the growth numbers look strong.
I'm pretty comfortable calling last week's 30% share price drop an overreaction, and the stock is back near its 52-week lows. On the other hand, you could argue that Apollo is simply fairly valued today, after an overvalued winter. The P/E ratio is historically high, but it's low compared to peers like DeVry (NYSE: DV ) or Strayer Education (Nasdaq: STRA ) .
Is the education sector inflated overall, or do Apollo and friends deserve to trade at rich valuations? The truth, as always, probably lies somewhere in between. I'd like to see a couple more earnings reports before making any investment decisions here -- and we're in luck: Strayer reports tomorrow morning. Hold yer horses!
Fish in a barrel
I almost feel bad for picking on another homebuilder, but they just keep the hits ... er, misses coming. This time, the hapless housing hombre is KB Home (NYSE: KBH ) . The company lost $2.17 per share on a non-GAAP basis, compared to last year's $0.34 profit per share and analyst expectations of a smaller $1.35 per-share loss. Sales fell 43% year over year to $794 million, below the $855 million Street guesstimate.
The shares lost 5% of their value as a result, and they're a staggering 47% cheaper today than their 52-week high. As bad as the business prospects look -- and even CEO Jeff Metzger thinks that the harsh housing market will persist for the foreseeable future -- I have to say that some homebuilders are starting to look cheap.
In KB's case, the company has a $2.2 billion market cap, below the value of cash plus inventories, minus debt. In other words, the enterprise value is about even with the net current asset balance. The market doesn't price in any growth prospects for the company at all; in fact, it appears to think that the company's inventory is overvalued on the books. KB took a $110 million impairment charge this quarter, but maybe that wasn't enough.
Do you think that this company is headed toward Chapter 11, or that it's severely overstated the value of its assets? If not, maybe it's time to take a closer look at homebuilders -- the ones that survive the housing crash should give you some nice returns when all is said and done.
Am I gold?
We end this tour of duty in Canada, where gold-mining specialist IAMGOLD (NYSE: IAG ) reported $0.05 of earnings per share, while Wall Street wanted $0.11. Heavy taxes and approximately $6 million of asset impairment charges accounted for most of the disappointment; the gold reserves in two mines now appear smaller than they did last year.
IAG is a small fish in a large international gold-mining pond, and it's really just getting started in exploiting some of its mines. The company may not have the fattest net margins in the business -- that would be either Compania de Minas Buenaventura (NYSE: BVN ) or DRDGOLD (Nasdaq: DROOY ) -- but this is the fastest revenue grower of the bunch, thanks to a couple of smart acquisitions. Management is investing in more exploration and research to get back to organic growth. Time alone will tell how that works out.
Given the meteoric rise in gold prices over the last year or so, I'm a bit stumped about why the gold diggers can't seem to turn the incoming revenue into cash. Maybe some of you gold bugs out there can help me out? Feel free to sign up for a no-cost CAPS account and annotate the IAMGOLD entry with your thoughts. I'm dying to get a grip on this quandary.
Over and out
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 ones are stuck in the mud for real.
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