Tic-tac-toe, investors want to know: Will data collator ChoicePoint (NYSE:CPS) make it three in a row for earnings misses when it reports its fiscal Q3 2006 numbers Tuesday morning?

What analysts say:

  • Buy, sell, or waffle? Eighteen analysts follow ChoicePoint, splitting their votes evenly between buy and hold.
  • Revenues. On average, they think sales fell 5% versus last year, to $253.4 million.
  • Earnings. And that earnings fell a bit faster, down 7% to $0.43 per share.

What management says:
As we discussed last quarter, ChoicePoint is in the midst of a corporate midlife crisis -- trying to decide what it wants to be after it has already grown up. To recap, ChoicePoint aims to sell off business units comprising 15% of its workforce and 14% of annual revenues, but only 6% of operating profits. In other words: the slowpokes.

In September, the firm announced the first such sale, of its Priority Data Systems unit, to "strategic ally" AMS Services. ChoicePoint expects to record a $3 million to $4 million after-tax loss on the sale.

What management does:
What does ChoicePoint intend to do with the proceeds of its sale? Buy back stock, apparently. In July, ChoicePoint upped its stock buyback authorization by $250 million, to a total of $400 million remaining. The announcement appears to have been management's response to the 15% dive the stock took after last quarter's results, and to the roughly 30 percentage points by which ChoicePoint's shares have lagged the S&P 500 over the last year.

Continuing margin shrinkage helps to explain why ChoicePoint has so lagged the benchmark. As you can see from the table below, rolling gross, operating, and net margins have been contracting for more than a year now.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

48.2

48.9

48.6

46.3

45.8

46.0

Op.

27.1

27.4

26.9

25.1

24.7

24.8

Net

16.4

16.5

15.9

13.3

12.5

12.2
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
What's the key to ChoicePoint's revival? As I've hinted a couple times now, it's the active steps ChoicePoint is taking to reverse its margin declines, by shedding less profitable businesses and focusing on more profitable ones.

Short-term, that should result in sales declines (businesses you no longer own don't generate revenues for you) and hits to profits (they also don't generate profits, and selling for a loss actually saps away profits) -- just as the analysts are projecting. Longer-term, though, ChoicePoint's decision to focus on its strengths looks to this Fool like a positive. On Tuesday, therefore, I'm not going to be spending nearly as much time worrying about the sales and earnings numbers. Instead, I'll focus on the prose portion of ChoicePoint's earnings release, and on what's said there about the progress of the restructuring.

Competitors:

  • Acxiom (NASDAQ:ACXM)
  • Automatic Data Processing (NYSE:ADP)
  • Computer Sciences (NYSE:CSC)
  • Dun & Bradstreet (NYSE:DNB)
  • First Advantage (NASDAQ:FADB)
  • Harte-Hanks (NYSE:HHS)

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Fool contributor Rich Smith does not own shares of any company named above.