Wall Street delivered its own special kind of pink slip to temporary staffing agency Manpower
Say it with me now: "Huh?!"
Numbers like those ordinarily have the people in pinstripes up north jumping for joy and salivating with greed (which can get messy). So what's the story behind the stock's collapse?
Well, there was one little caveat to the profits report, which if you interpret it one way, reverses the outstripping of revenue growth by profits growth. Manpower benefited mightily from the weakening U.S. dollar, as profits earned abroad translated into bonus dollars here at home. Net out the effects of currency fluctuations, and Manpower would have increased revenues by only 16%, and profits by less than that -- just 13%.
On the other hand, if you focus on Manpower's results for all of 2004, that dual-interpretation dilemma disappears. If you pretend the currency fluctuations had no effect on Manpower's results, the company's 23% increase in earnings and 78% increase in profits (to $2.59 per share) would look just superb. But even the "constant currency" picture shows a 14% increase in revenues and a 44% increase in profits. So currency fluctuations or none, Manpower's profits rose faster than its revenues, reflecting economies of scale as well as a growing business.
Which was precisely why Wall Street punished the stock. The problem wasn't this quarter, in which Manpower hit analysts' projections on the nose; the problem was that Manpower let the air out of the Street's expectations for next quarter. Analysts were hoping to hear the magic number: "$0.46." What Manpower whispered in Mr. Market's ear, however, was just "$0.34 to $0.37."
Was this fair? Did Manpower deserve its fate? I believe it did -- but not just for failing to tell investors what they wanted to hear. Manpower's "firing offense," if you will, can be found on its income statement, where it reported a 15% rise in the number of its average shares outstanding. That's stock dilution on a grand scale. And investors shouldn't overlook that kind of offense as easily as they might forgive a cubicle slave swiping a pack of Post-It notes from his employer.
Wondering why Fools so dislike stock dilution? Because, as Paul Elliott explains, it's an investor's worst enemy. That's why. Confused about stock dilution and the ways in which it can affect your investment? Read Stop! Thief!.
Fool contributor Rich Smith has no position, short or long, in Manpower.