It's not often that numbers move so closely together. Three months ago, American Science & Engineering (NASDAQ:ASEI) apparently reported 33% lower earnings than Wall Street had been expecting. The stock took the expected tumble, and has been rolling downhill ever since. As we head into tomorrow's report on fiscal Q1 2007, shares of the cargo X-ray specialist can be had for 31% off its May 18 price. Will the sale end tomorrow?

What analysts say:

  • Buy, sell, or waffle? Wall Street doesn't think so. Half of the eight analysts tracking AS&E call it a buy. The rest of the votes split evenly between hold and sell.
  • Revenues. Analysts will be looking for 12% sales growth, to $39.3 million, tomorrow.
  • Earnings. They also expect a 5% decline in profits, to $0.74 per share.

What management says:
But back up a step. Did AS&E really miss earnings at all? Not according to CFO Kenneth Galaznik. In a filing with the SEC that post-dated the ill-received results by a week, Galaznik argued that analyst consensus expectations last quarter were of the "pro forma" variety -- meaning it left something out. Specifically, (again, according to Galaznik), the $0.76 per share that Wall Street wanted to see last quarter did not account for a "charge for certain outstanding warrants." Meanwhile, the $0.51 per share in profits that AS&E reported did account for this $0.42 charge (a fact pointed out by my fellow Fool Dan Bloom). In other words, comparing apples to apples, the company actually beat the consensus estimate, and its pro forma earnings for the quarter might accurately have been reported as $0.93 per share -- 22% higher than Wall Street expected.

Do I buy the argument? It sounds logical, especially when you consider that we individual investors rarely know what "flavor" of earnings the analysts refer to when they make their estimates: GAAP, adjusted, pro forma, what have you. Then again, if the market bought Galaznik's expectation, I doubt you'd see the stock price still sitting 31% below its May 18 price.

Lost in the back-and-forth between management and Mr. Market, though, is the overarching moral of this story: Widely published analyst estimates rarely come with the context investors need to make informed decisions -- especially the "consensus estimate." On the contrary, they're sowing the seeds of confusion, costing companies credibility, and investors, money.

What management does:
Leaving aside for the moment what recipes Wall Street uses in producing its voodoo pro forma estimates, let's look at how AS&E has performed under GAAP. With sales up 57% over the last six months, and cost of goods sold up only 26%, gross margins continued marching higher. Operating costs that rose 37% in the same period -- again, slower than sales -- kept operating margins rising as well. Only the firm's net margin stumbled, and as far as I can tell, only for the reason discussed by management.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
AS&E is one of a precious few picks of the Motley Fool Rule Breakers newsletter to earn a coveted "repeat" recommendation. I'd love to tell you what the analysts over there are thinking about AS&E right now, but the most recent update is less than two months old -- and it's against Fool policy to give that advice away free before our paying members have had time to act on it.

I can tell you, though, that as of the previous update, our Rule Breakers analysts had reviewed the firm's disputed fiscal 2006 report and saw "no cause for concern." If that's all you need to know to rest easy owning AS&E as a long-term investment, great. If you need further details, though, you're welcome to take a free trial of the service and get the full picture. Just click here.


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Fool contributor Rich Smith does not own shares of any company named above.