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Earnings per share rolled in at $0.24, up 35% from a year ago and in line with analysts' expectations. Improved margin performance accounted for much of the earnings gain, as net profit margins improved to 15.2% in the period from 12.5% last year. The ever-present demand for power reliability by the burgeoning growth of Internet-based systems continues to be the long-term catalyst for APC's business, and the company said it is comfortable with current full-year EPS projections of $1.29, equating to 23% year-on-year growth.
Still, the quarterly results were not of the "surprise" variety seen in the previous quarter, when EPS came in $0.02 above the mean estimate. Further, revenue growth of 12% in the quarter, while not horrible, was decidedly much closer to the 8.7% growth in Q3 than the 22% growth seen in Q4. And while APC's margins were up year-over-year, they slipped somewhat from the previous quarter's showing. On the balance sheet, the company appeared to be as solid as ever, with the one possible negative being that inventories inched up after a well-received sequential decline in the prior period.
For the long-term investor, none of these items are worthy of being classified as red flags, or even yellow flags for that matter. Still, the short-term, instant-gratification tendencies of the market won out this morning, and APC's stock was tossed for a roughly 10% loss in early trading. If such a percentage drop had happened to the Nasdaq composite index or some other market gauge, writers would be whipping out the dreaded "correction" label. For APC shareholders, however, such a bump has been far from an uncommon occurrence lately. Over the past few months, the company's share price has been jumping up and down like a hyper-caffeinated World Bank protester on an almost daily basis, as this chart illustrates.
APC's irregular share price heartbeat over the past few weeks raises an important point about investing, since these day-to-day ups-and-downs can often serve as the deciding factor in driving heretofore committed buy-and-hold shareholders out of stocks at inappropriate times. It's human nature to equate higher price with higher value and lower price with lower value, and normally this little behavioral shortcut works pretty well. After all, there is a big difference between that $3,000 ruby ring in the local upscale jeweler's window and the similarly sized $300 Rubyette (tm) ring being hawked on QVC at the wee hours of the morning, and it's not just the 10x spread between the price tags.
In a secondary market made up of individual stocks, however, the price-value relationship can occasionally get out of whack. Such a view may seem to run counter to the idea that stock prices at all times express all relevant information available to market participants at that moment of time, including information about future expectations. While an alluring way of looking at things, where this concept and the Efficient Market Theory that it spawned fall short is in failing to adjust for whether the information or expectations being priced into a stock today are actually the right ones. After all, if it was known all along that Wal-Mart (NYSE: WMT) was going to be a $250 billion company by the year 2000, why wasn't it priced that way in 1980, or even in 1995?
Investors have zero control over how companies like APC are priced in the market on a daily basis. Instead, we have to accept what's handed to us and respond accordingly. This underscores the need to know something about the intrinsic value of the companies you own, a both difficult and dynamic process.
While it's true that probably no one can step forth with a discounted cash flow or other valuation model that perfectly explained in 1990 how APC would grow its business in such a way to justify a 7,000% rise in its market value just 10 years later, that shouldn't stop an investor from trying. What is conceivable is that an investor who understood the firm's business well enough in 1990 to form certain expectations and then regularly readdressed those expectations as the business' prospects changed could, after 10 years' time, end up with a cumulative model that explained fairly well the company's share price appreciation. For APC shareholders and other investors who are scratching their heads over the market's day-to-day repricing of their shares, a well-conceived, flexible model and solid fundamental business analysis are the best security blankets available.
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