3 Earnings Reports That Caught My Attention Last Week

As fourth-quarter earnings reports begin to wind down, and with three-quarters of the year already in the books, I can't help but point out that the majority of reports up until now have been better than expected. With so many companies reporting during the weeks that comprise earnings season, it's easy for some earnings reports to fall through the cracks.

Each week this year, I've taken a look at three companies that could be worth further research after either beating or missing their profit expectations. Today, we'll take a gander at three more companies that reported earnings last week. They may have slid under your radar, but they deserve a look.

Source: Yahoo! Finance.

Office Depot
It may appear that office supply chain Office Depot had a blowout quarter, with the company reporting third-quarter results that trumped Wall Street's estimates, but there are more to its results than meet the eye.

Office Depot's revenue declined 5% during the quarter as a slowing global growth environment and tough competition challenged its results. More important, Office Depot outlined plans to downsize some of its retail stores in the hope of saving $20 million by next year. The plan involves scaling down or relocating 100 of its larger stores, with the company noting that it plans to close between 10 and 20 stores annually as leases expire. In addition to this downsizing, Office Depot adopted a poison pill to avoid the possibility of a hostile takeover.  

As an outsider looking in, this looks like the same old Office Depot that's struggling to survive despite the better-than-expected results. Taking the possibility of a buyout off the table takes any bit of optimism away from shareholders. Instead, I'm sticking with my previous assessment that Staples (SPLS) is the best investment within the office supply sector. Staples was the first chain to take the initiative to downsize its stores, which puts it well ahead of Office Depot in that department, is consistently profitable, and pays out a robust 3.9% yield.

Activision Blizzard
A few weeks ago I reversed my opinion on Activision Blizzard from a CAPScall of underperform to an expectation that it would outperform the S&P 500; needless to say it hasn't paid off yet. But, looking at Activision's third-quarter results, I'm having a hard time figuring out exactly why investors are pummeling this company so badly.

Activision, the name behind such franchises as World of Warcraft, Diablo, and Call of Duty, absolutely crushed its previous guidance of $690 million in revenue by reporting a 20% increase in sales to $750 million. Activision saw double-digit growth among all geographical regions, with North America contributing the biggest boost, rising 23%. Furthermore, digital revenue saw a nice rebound, up 11%, lending credence to the move toward more digitized content.

Activision is a value stock at its finest. It ended the quarter with $3.36 billion in cash ($3 per share) and no debt, boosted its operating margin by 690 basis points as productivity improved and costs rose by just 10% (mainly due to increased marketing expenses), and it trades at just 10 times forward earnings. Make no mistake about it; this was a fantastic quarter by all measures.

Digital Generation
Ad management and distribution company Digital Generation has always had a flair for the dramatic around earnings time, and it didn't disappoint this past week. Following a monstrous goodwill impairment charge of $208.2 million, Digital Generation recorded an adjusted loss of $0.42 per share as revenue rose 11% from the year-ago period. Unfortunately, shareholders had been looking for a profit of $0.05 per share. Online segment revenue spiked 40% thanks to acquisitions, but overall television revenue dropped 1%, holding back profits.

The big news, and the impetus for the company's late-week rally, appears to be the ongoing strategic review being conducted by Goldman Sachs (GS 2.92%). In layman's terms, strategic reviews can sometimes lead to restructurings or selling off non-core assets, but they also fuel speculation from investors that a company may put itself up for sale. On paper, Digital Generation's online and HD advertising content look poised to benefit over the coming decade, but the results have yet to truly materialize. The company may indeed be better suited under different management, but we'll have to wait and see what Goldman Sachs' assessment determines. Either way, the company bears some watching.

Foolish roundup
Sometimes an earnings beat or miss isn't as cut-and-dried as it appears. I've given my two cents on what's next for each of these companies -- now it's your turn to sound off. Share your thoughts in the comments section below and consider adding these stocks to your free and personalized Watchlist.

• Add Office Depot to My Watchlist.
• Add Activision Blizzard to My Watchlist.
• Add Digital Generation to My Watchlist.

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