These three companies just didn't live up to Mr. Market's expectations last week. Whether there was a target set by the company's own management, by Wall Street analysts, or by the market at large, that miss can have serious consequences for the share price. And then it's up to us to decide whether it's a death knell or a buy-in opportunity.
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, neither a good yardstick nor a comfy couch could prop up the son of Sam (Walton, that is). Confused? Let's fix that.
The measure of a company
Our first miscreant this week is measurement specialist Agilent
Of course, CEO Bill Sullivan decided to put a positive spin on the misses, noting that revenue was indeed "just shy" of the goals but presenting a revised, pro forma earnings figure that did skid into the guidance range. Overall, he said that Agilent "met its aggressive performance targets despite very divergent market trends during the third quarter."
The rest of the report continued in the same breezy, optimistic fashion, and was fit for playing this nice little game I know. Very nice, Bill.
Look, I still believe in Agilent's long-term prospects, and the earnings miss itself is hardly cause for concern. But the way management bends over backwards to put a nice patina on a disappointing report makes me wonder if there's something else we don't know here. I laid out this argument in greater detail when DivX
The bottom line is that I'd rather see an honestly presented bad quarter than a smoke-and-mirrors success. You can do better, Agilent -- and your shareholders are worth better than this.
Let's move on to underperformer No. 2: furniture retailer La-Z-Boy
Restructuring charges and store closings accounted for $0.04 per share of that earnings miss, and the rest was just an old-fashioned period of bad sales and high fixed costs. Seasonality was a factor, but hardly enough to explain the entire problem.
I think La-Z-Boy, an Income Investor recommendation, is feeling the pain from misjudgments from a couple of quarters back. This is not a quick-turnaround business, and it takes time to plan new models, build up appropriate inventory levels, and ship the goods out to hundreds of storefronts across the nation. So management set the bar too high a while back, ended up saddled with unsold and unsellable couches by the boatload when consumer spending habits cooled down more than expected, and is now chewing through its own foot to get rid of that ball and chain.
Although this is an industrywide problem, La-Z-Boy is doing worse than average in a depressed sector. Haverty Furniture
La-Z-Boy's share price has dropped 28% over the past 52 weeks, and 60% since May 2002, adjusted for dividends. And it's not an unfair punishment, either -- valuation ratios have remained rather stable, and it's the operating results that have deteriorated. There has to be a light somewhere at the end of the tunnel -- La-Z-Boy had better hope it's not an oncoming bullet train.
The bigger they are ...
Last but certainly not least, we have broad-line retail king Wal-Mart
Any time you see that combination -- high sales, low earnings -- it looks like a discount campaign gone too far. Retailers always have to weigh margins against raw revenue, and it's a tricky balancing act at best. Luring customers into stores with promises of sweet, sweet sales can backfire, hurting the bottom line.
Closest rival Target
'Til next time
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.
Further Foolish reading:
- The Best Retail Stock for 2007 Revisited
- Midyear Checkup: Broad-Line Retailers
- This Just In: Upgrades and Downgrades
- The Next Big Bargain
Wal-Mart is an Inside Value recommendation. Seeking great deals on unfairly punished stocks? Philip Durell and his merry band of Fools at the newsletter service can help you find great stocks at ridiculously low markdowns. Try a 30-day trial to see whether bargain-hunting is right for you.
Fool contributor Anders Bylund holds no position in the companies discussed this week, but he does own a beautiful double-recliner La-Z-Boy couch, from which he sometimes plies his Foolish trade. The Fool has a disclosure policy, and you can see Anders' holdings for yourself.