These three companies just didn't live up to Mr. Market's expectations last week. Whether the target was set by the company's own management, Wall Street analysts, or the market at large, these firms' misses can have serious consequences -- and real effects on share prices.
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 have a blurry picture on the small screen; a nation of sleeping handymen; and a set of chips that really are down.
Excuses, excuses
Our first miscreant this week is digital video technologist DivX (Nasdaq: DIVX). The company reported first-quarter results a couple of weeks ago, much to the chagrin of investors everywhere. The lackluster report sent shares tumbling more than 15% in a couple of days. But management promised to use an upcoming JPMorgan technology conference appearance to explain what's going on, and what happened last week.
The company's presence in this underperformer rundown should suggest that the market didn't much appreciate the new information, either, despite the company's best efforts to assuage Wall Street's fears.
Under the heading "What the heck happened in Q1?" DivX CEO Jordan Greenhall presented the quarter as a study in dichotomies between perception and reality. Where the headlines blared "DivX Misses Earnings!" the company actually handily beat targets -- on a pre-tax basis. Analysts complained that operating expenses were spiraling out of control, so DivX noted that most of that cost increase came from one-time items, and that the product development budget was 5% lower this year.
With all of that in mind, Greenhall summed the period up as a great quarter plagued by poor communication, and promised to do a better job of getting the bullish message across in the future.
He'd better start right now, then. These explanations are so full of caveats and pro forma assumptions that they sound more like excuses. The growth story here is undeniable, and I like the open-standard business model DivX employs, but it takes a serious amount of spin to present the company's first quarter as any great success.
Spin doctors tend to make Fools suspicious, and this is no exception. Management would look much better if they simply presented a bad quarter as a bad quarter, and laid out plans for fixing the problems. This ain't it. If you want a digital media technology idea, consider a suggestion from our Motley Fool Stock Advisor team, Dolby Labs (NYSE: DLB), instead.
What comes around...
Next up on our dance card is home-improvement retailer Lowe's (NYSE: LOW), which missed the low end of its own earnings guidance by one penny per share. Management pointed fingers at the tough housing market -- which isn't inspiring a lot of nationwide home repair -- along with price deflation on lumber and plywood products.
A small miss is still a miss, especially when the company's own management set the target to begin with. Fellow Fool Ryan Fuhrmann thinks that Lowe's is doing better than archrival Home Depot (NYSE: HD) in any case, but that either stock could present a good value opportunity at these depressed valuations.
I'm convinced that we have yet to see the bottom of the housing slump, but the home improvement giants do not live and die by real estate sales alone. Movers, real estate flippers, and other home sellers can definitely boost the warehouses' results when times are good, but we who stay put still need to maintain our aging houses. It's up to the retailers to drive that traffic into their stores, and to come up with new revenue-generating ideas.
This is the slow part of a very long business cycle. Five years ago, Lowe's stock commanded about twice the P/E ratio it does today, and so did Home Depot. The story stays the same, whichever relative valuation metric you choose to look at, from price-to-book to price-to sales, or even enterprise value to free cash flow.
Lowe's management seems to think along these same lines. Following the earnings release, the board approved a $3 billion share buyback plan and upped its quarterly dividend by 60% last week. You typically take such measures when the company is financially sound and the stock undervalued. Home improvement stocks are cheap today, and you can't keep a good company down forever.
Semi-achieving semiconductors
That brings us to broad-line semiconductor designer Analog Devices (NYSE: ADI), our final stop on today's somber tour. This was another single-penny miss compared to the lowest end of official guidance, though the major analyst-consensus reporters -- Reuters, Thomson, and Zacks -- disagree with each other on whether the results met Wall Street's expectations.
$30 million of restructuring expenses, stock-based compensation, and acquisition-related charges shouldn't be used to explain the shortfall. None of these items came out of the blue, and they should have been accounted for in last quarter's guidance. A $19 million legal benefit from an intellectual property lawsuit against Maxim Integrated Products (Nasdaq: MXIM) would be more of a surprise than any of the "one-time" charges.
Management comments about the order flow seemed like the light at the end of a long, dark tunnel. Customer demand picked up at the end of January and has been going strong ever since. But even so, guidance for the next quarter fell significantly short of the current analyst expectations for that period, and the stock price dropped 10% overnight.
That forecast assumes that this quarter's gross margins remain unchanged, while operating expenses nudge up slightly and revenues could come in higher or lower than this quarter's, give or take about $15 million. That's a rather noncommittal outlook, especially given the optimistic order volume comments.
It's a head-scratcher so far, and the Street surely doesn't like uncertainty. We'll have to wait a couple of weeks for the next update on the semiconductor industry, when National Semiconductor (NYSE: NSM) reports earnings on June 7.
Foolish finale
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.
Further Foolish reading:
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Fool contributor Anders Bylund holds no position in the companies discussed this week, but spends an inordinate amount of time in home improvement centers. Home Depot is a current
Motley Fool Inside Value
pick, and Dolby Labs is a
Motley Fool Stock Advisor
recommendation. The Fool has a disclosure policy, and you can see Anders' current holdings for yourself.
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