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Why II-VI Stock Dropped 10% This Morning

By Rich Smith – Nov 12, 2019 at 11:39AM

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Earnings miss, a second miss may be coming -- and investors see red.

What happened

Shares of laser components maker II-VI (COHR 1.69%) got blasted in early Tuesday trading, falling more than 10% before recovering to something more like a 7.5% loss as of 11:10 a.m. EST.

The reason: earnings.  

This morning, II-VI reported a "miss" on its fiscal Q1 2020 results, with non-GAAP (adjusted) sales of $0.57 per share coming in short of the $0.60 per share that Wall Street had predicted (although sales of $340.4 million exceeded the consensus estimate).  

Mission Impossible-style red laser fence

Image source: Getty Images.

So what

Those revenues, by the way, were up 8% year over year, boosted only slightly by the closing of the company's acquisition of Finisar on September 24. (The quarter closed just a week later, on September 30). This was, as management noted, "the largest acquisition in our history."

As for profits, while adjusted earnings missed estimates, actual GAAP results were...even worse. As calculated by generally accepted accounting principles, II-VI didn't actually earn anything, but rather lost $0.39 per share.

And all of this loss, by the way, was attributable to II-VI's perhaps ill-considered acquisition of Finisar. As management pointed out, "Legacy II-VI" would have actually earned a profit of $0.34 per share for the quarter.

Now what

Bad as investors' reaction to today's news was, it could have been worse -- and the reason for that is II-VI's guidance.

According to management, II-VI is now expecting Q2 sales to range from $590 million to $630 million, producing a pro forma profit of between $0.20 and $0.50. All of these numbers fall short of what Wall Street has been predicting -- $652 million in sales and $0.64 in non-GAAP profits.

In short, after missing earnings in Q1, II-VI now appears to be promising to miss again in Q2 -- exactly the opposite of what growth investors wanted to hear.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends II-VI. The Motley Fool has a disclosure policy.

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