Plantronics' (NYSE:PLT) second-quarter earnings report was not pretty, but at least the company didn't start its press release with a Japanese apology like another company did last week.
In fairness, Plantronics nailed the updated guidance it gave a few weeks ago with sales of $172.2 million and earnings per share of $0.28, but its shares are still off almost 6% in Wednesday afternoon trading. What is it that has investors heading for the exits? It's a two things, actually, and they're both related to Plantronics' business going through change in order to continue growing.
The items that are showing up in Plantronics' financials aren't the ones that are likely to impair its business permanently, but they are reason for concern, given that the company needs to compete with Motorola (NYSE:MOT), Sony (NYSE:SNE), Logitech (NASDAQ:LOGI), and others for sales of headsets, speakers, and other audio devices.
Plantronics' balance sheet, while strong overall, is showing some weakness. Compared with last year, sales were up 32.3%, but accounts receivable and inventory balances were up even more, at 55.7% and 50.4%, respectively. This can partially be explained by the company's recent acquisition of Altec-Lansing, but investors will want to follow this trend and make sure that it doesn't worsen.
The other reason for pause is that the company's investments for growth aren't unfolding smoothly. Plantronics' core Audio Communications Group (think headsets) saw its gross margins decline from 53.4% to 45.5% because it incurred additional expenses associated with both a product transition and capacity expansion. This gross margin decline could be temporary but, given that the company's increased sales of its Bluetooth wireless headsets was offset by a decline in its older corded headsets, there are reasons for concern.
Plantronics is still a solid company with a pretty solid balance sheet, but don't be fooled by its low P/E multiple of 14.8. Plantronics' free cash flow is actually a bit lower than its net income, despite having been aided the last couple of years by tax benefits from stock options. Taking into account the number of competitors Plantronics faces, combined with the (hopefully short-term) problems the company is having with product transitions, the stock isn't quite cheap enough for investors to consider, given the business risk. That doesn't make Plantronics a bad company; it just means that the stock is not the best candidate to earn market-beating returns over the coming year.
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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy .
