A 24% drop in a single day can churn the stomach of even the most hardened investor. That's exactly what happened to Insteel Industries (NASDAQ:IIIN) on April 21 -- the day of its earnings release. And for what, missing expectations? Well, yes, from what I can gather. But the company still earned a record amount for the second quarter of fiscal 2006.
This truly boring maker of concrete reinforcement materials, used in buildings, bridges, pipes, etc., had sales of $89 million last quarter. It earned $7.4 million, an increase of 47% from the year-ago quarter. Ignoring the contribution of a discontinued operation last year, earnings were 70% higher for this quarter, which translated into income of $0.80 per share. However, the single analyst with an earnings projection was hoping for $0.98 per share, resulting in an 18% miss. Revenue also came in about 4% below the analyst's projections.
The company released the earnings press release before the market opened. When trading began, the stock opened 19% below where it had closed the day before. By the time the smoke had cleared at the end of the day, the price was 24% below the previous day's close. Now, if investors had taken the time to read the earnings report press release or listen to the conference call, they would have realized that things were not that bad. Really.
Forty-seven percent earnings growth on a year-over-year basis is quite good. Honestly. Maybe, though, because the stock price had risen 230% since the beginning of the year, that amount of earnings growth wasn't good enough. Maybe after analyzing the situation and trying to turn things around, the announcement of closing the money-losing industrial wire segment wasn't good enough. This will, of course, equate to an earnings hit next quarter. I think of myself as one listener to the conference call who actually applauded management for not wasting time and resources in continuing turnaround efforts.
On thinly followed companies like Insteel Industries -- only two analysts follow it according to the company's investor relations website -- one can expect a bumpy ride. The information flow is usually not as robust as with larger, more heavily followed companies. This could also have an impact on the one or two earnings estimates made, allowing for greater chances of "missing."
The fact is, a closer look at things reveals that things just weren't quite as bad as a look at the chart would indicate. After all, the company posted good earnings in a slow period of the year, expansion of production capacity when current capacity is running about 90%, high demand for their products because of a recent bill's passage for hurricane rebuilding efforts, and the rapid termination of a money-losing segment. And I can't help but think these are all good things for the company and will likely to lead to future growth.
For those who panicked and sold at the opening -- half of a normal day's volume occurred in the first five minutes -- well, your loss, I guess. For those who recognized the buying opportunity, congratulations.
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Fool contributor Jim Mueller owns shares of Insteel Industries. The Fool discloses these things, you know.
