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 EarthLink Holdings Corp (NASDAQ: ELNK) rose as much as 14% on Tuesday after the managed network and cloud services company announced first-quarter results that beat Wall Street expectations on revenues and earnings per share and raised guidance for the full year.
So what: Here's how the headline numbers shook out:
|
|
Actual |
Analysts' Consensus Estimate |
|---|---|---|
|
Q1 Revenues – BEAT % Surprise |
$282.4 million +4% |
$271.2 million |
|
Q1 Earnings per share* – BEAT % Surprise |
($0.10) +44% |
($0.18) |
|
|
Guidance |
Analysts' Consensus Estimate |
|
2015 Revenues |
$1.06 billion-$1.075 billion |
$1.06 billion |
|
2015 Adjusted EBITDA |
$215 million-$225 million |
$202 million |
*Adjusted
Source: Thomson Financial Network, Zacks Investment Research, EarthLink Holdings Corp.
Revenues did come in 4% above the consensus estimate. Nevertheless, that still represented a 5% year-on-year decline, with Business Services (the company's largest segment) registering a 3% drop. According to the company, this was due to "shifting focus away from low-margin revenue streams." Here's hoping! (Actually, that's a little unfair since there is some evidence of that shift. Business gross margin improved by more than three percentage points relative to the year-ago quarter to 54.2%.) Still, it would be nice to see a return to growth – the company has not experienced year-on-year growth in quarterly revenues in three years.
Meanwhile, despite a loss on a GAAP (generally accepted accounting principles) basis, the company continues to generate positive cash flows ($44 million in unlevered free cash flow in Q1). Indeed, depreciation and amortization, a non-cash charge, significantly exceeds capital expenditures. The company (wisely) used $26 million of that cash to reduce its leverage by repurchasing debt paying an 8.875% coupon.
Now what: At 3.5 times free cash flow (per research firm Morningstar), EarthLink Holdings' shares look very cheap. Part of the explanation for the depressed multiple is the lack of growth; as such, the stock is what I would consider a special operation. Such operations can be very interesting and profitable, but I would suggest the overwhelming majority of individual investors avoid them. They require a lot of due diligence, a sound knowledge of valuation, and constant, careful supervision. In other words, they are a poor investment on the basis of investors' time. There are easier opportunities to earn an honest return.
