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Why Shares of CommScope Holding Company Crashed Today

By Timothy Green - May 1, 2018 at 1:35PM

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A guidance cut was not received well.

What happened

Shares of CommScope Holding Company (COMM 6.87%) tumbled on Tuesday following the communication network infrastructure provider's first-quarter report. CommScope beat analyst estimates across the board, but it revised its guidance to reflect new challenges. The stock was down about 29% at 12:45 p.m. EDT.

So what

CommScope reported first-quarter revenue of $1.12 billion, down 1.5% year over year but about $10 million above the average analyst estimate. Sales in the connectivity segment declined by 1% year over year to $674 million, while sales in the mobility solutions business slumped 2% to $447 million. Both segments enjoyed sales growth in international markets but suffered sales declines in the U.S.

A CommScope cable tray.

A CommScope cable tray. Image source: CommScope.

Non-GAAP earnings per share came in at $0.49, down from $0.52 during the prior-year period but $0.02 better than analysts were expecting. On a GAAP basis, the connectivity segment enjoyed a 13% rise in operating income, while the mobility solutions segment suffered a 31% decline.

Investors were more focused on the company's guidance than its first-quarter results. Due to expected price reductions at certain large North American operators and higher input costs, CommScope was forced to reduce its full-year guidance. The company left its expected revenue range of $4.675 billion to $4.825 billion unchanged, but it reduced its guidance for non-GAAP EPS to a range of $2.33 to $2.48. That's down from the previous range of $2.56 to $2.71, but up from $2.14 reported for 2017.

Now what

CommScope plans to cut costs to partially offset the customer price changes, focusing on manufacturing optimization, value engineering projects, and additional product in-sourcing. The company still expects to grow non-GAAP earnings in 2018, but not by nearly as much as it expected just a few months ago.

The guidance cut is certainly a disappointment, but the market's reaction may be overly severe. Shares of CommScope now trade for around 11.4 times the midpoint of the company's new non-GAAP EPS guidance range. That beaten-down valuation may give value investors a reason to take a closer look at the stock.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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