The following three companies just didn't live up to Mr. Market's expectations last week. Whether the target was set by the company's own management, by Wall Street analysts, or by the market at large, that miss can have serious consequences.
Sometimes, an earnings stumble is a signal to sell. But digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down. Today, there's a massive online sale, a collapsed uranium mine shaft, and it's all on TV, coast to coast.
Meet the new Overstock, same as the old Overstock
For starters, we have one of our regulars: discount e-tailer Overstock.com
For the fourth quarter, Overstock turned in $298 million of revenue, 6% below the comparable year-ago quarter. Analysts expected a net loss of about $0.85 per share, but got $1.92 of red ink instead. That's far more harsh than the $0.33-per-share loss in the 2005 holiday season.
But the stock price actually gained a few percent the following day, despite the bone-crushing earnings miss. Analysts started to upgrade the stock, and if you dig a bit deeper in the story, it all makes some kind of sense.
For one thing, Overstock bit a few bullets in the just-completed quarter and year, and the company may very well have hit rock bottom already. Byrne explained that Overstock built out its infrastructure to handle about $2 billion of annual sales -- but did so just as the company exited its hypergrowth phase, sticking it with $800 million for each of the next two years.
Lease payments on a swanky new HQ, and depreciation on a massively oversized technology infrastructure, put about $20 million of expenses into 2006 that shouldn't be there in 2007, as management moves back into a section of its warehouse and scales back that order-handling system a bit.
Furthermore, $93 million of unsold inventory at the end of 2005 became just $20 million a year later, thanks to aggressive sales and a deliberate strategy of focusing on higher-margin, lower-volume products. It all adds up to operating cash flows that look much nicer than the net income line. Perhaps this really is the end of the storm.
I once owned a few shares of this company because I believed in Byrne's vision of extended growth that would translate into massive profits when the company took its foot off the marketing pedal. That was two years ago. Now, Overstock is more of a turnaround story and a stock with plenty of bad news priced in. Can Overstock make the transition to a more upscale clientele and start growing its margins, rather than its revenues? It's up against some top-notch competition from the likes of Amazon.com
All aglow over Cameco
Let's move on to Cameco
Of course, it would have been hard for the lone analyst following this company to foresee a $17 million charge -- $0.05 per share -- for dealing with a partly collapsed and flooded uranium mine in northern Saskatchewan. But that's hardly the only problem here.
Management said that quarterly results are a poor measure of the company's success, and held up a strong full-year showing as evidence. But could the unusual order distribution, where customers bought more uranium than most years in the first quarter and less in the fourth, have anything to do with the rising price of this ritzy commodity? Uranium prices roughly doubled from the fourth quarter of 2005 to the corresponding period in 2006.
It's a cyclical business, and reactor operators will eventually have to restock their fuel reserves. If they don't have the luxury of waiting until material prices come back down a bit, Cameco could stand to make a mint in future quarters.
Dishing it out
The final miscreant in this roundup is satellite TV provider DirecTV
In all fairness, $0.29 is a substantial improvement over last year's $0.09, and a 16% revenue ramp-up is nothing to sneeze at in a mature industry.
DirecTV's secret sauce in its battle against competing satellite broadcaster EchoStar
The market liked these results, giving the stock price an immediate 8% boost upon their release last Wednesday. However, the price has since drifted downward back to approximately where it closed on Tuesday.
Rupert Murdoch's News Corp
In the meantime, DirecTV certainly looks like the healthier satellite competitor, though EchoStar hasn't reported its recent results yet.
Every cloud has a silver lining
Some of these underperformers are victims of larger circumstances, while others might have only themselves to blame. It's up to you to decide which down-on-their-luck companies should be able to pull themselves up by the bootstraps, and which really are stuck in the mud. Come back next week, and we'll take a look at another batch of mishaps and disappointments. It'll be fun and educational.
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Fool contributor Anders Bylund no longer holds any position in any of the companies discussed this week. His DVR is hooked up to a cable feed, and constantly crammed full of kids' shows. The Fool has a disclosure policy, and you can see Anders' current holdings for yourself.