I get a lot of email in response to articles that I write. The most interesting ones came after I wrote a negative piece on a small-cap company called Federal Signal
One of the emails I received came from Federal Signal's CEO, Robert Welding. He obviously had a different opinion than I did. He also expressed an interest in visiting the fire department where I volunteer to help put out wildfires. It turns out he has a connection to the town where I live and was planning a visit over the July Fourth weekend.
I took his visit as a great opportunity to learn more about the company. How many CEOs go out to visit small customers like us? Not only did Mr. Welding come for a visit, but he also brought the head of the fire trucks division with him. The most important thing I learned was that Federal Signal may be a China play.
As rural China develops, there will be a need for the types of vehicles Federal Signal makes to service the new infrastructure that goes with modernization. This sounded very exciting to me. Unfortunately, there is no clear timeline for this to take place. This is understandable, because after all, China is an emerging country and just about everything new takes time to come on line. Mr. Welding also indicated that Federal Signal was going to be divesting some niche businesses in which previous management had invested.
It was the start of that divestiture program that contributed to the company reporting a second-quarter loss of $0.05 per share today, versus an estimate of a gain of $0.15. This looks like a big miss. The report says the loss is from continuing operations. There are other nuggets in the report that may be cause for concern. Cash flow went negative because of rising inventories. Corporate expenses went up -- as expected -- due to costs associated with complying with Sarbanes-Oxley. Also, Federal Signal took on slightly more debt. Lastly, revenue went down to $304 million compared with $311 million in the same quarter last year.
All in all, this was not a great report. I am thankful to Mr. Welding for coming out to visit our fire department, and he may be the guy to turn the company around. I still do not see any reason for a near-term lift in the stock price, though. China really could be big, but it could take a long time. I would also expect it to be several quarters before the restructuring that management has been working on is completed.
Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time neither he nor his clients owned any of the stocks mentioned.