Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of RealD (NYSE: RLD) rose about 10% today after clearing the low hurdles of Wall Street's expectations with its fiscal-third-quarter earnings report. The beleaguered 3D film experience specialist also announced that it will be "evaluating its strategic options" with the help of investment bank Moelis & Co.
So what: RealD's quarterly revenue collapsed by 41% to reach just $32.6 million, but this was still better than the puny $25.1 million in revenue Wall Street's analysts had modeled. The company's quarterly loss ballooned from a mere $0.01 per share in the year-ago quarter to $0.23 per share in its latest report, but analysts had expected an even uglier $0.35 loss per share.
However, it appears that news of RealD's strategic evaluation is the real driver of today's pop. This phrasing, as reported by Bloomberg, generally implies that a company is ready to be acquired.
Now what: RealD investors have never gotten anywhere close to where its stock was in mid-2011, before its shares cratered and its fundamentals followed its share prices in a race to the bottom. RealD's top and bottom lines both peaked years ago and have never come close to their prior highs. Today's earnings report only deepens that ongoing slide. On the plus side, RealD's free cash flow has been growing lately, and its price-to-free-cash-flow ratio is just 17.7 today, but that "growth" only came after free cash flow went negative in 2013. The same downward trend seems to have already begun, as RealD's latest report has pushed its trailing-12-month free cash flow lower than where it was in the prior quarter.
I don't expect RealD to grow much from here on out (its technology is already in use on 26,500 theater screens worldwide), and any potential buyer will certainly be taking a long, hard look at the company's weak fundamentals before deciding to buy it. RealD has been more of a speculative stock than a worthwhile long-term investment ever since it cratered in 2011, and I don't expect it to suddenly become a good long-term investment now that it's looking to possibly sell out.