Motley Fool Hidden Gems Watch List stock Rogers Corp. (NYSE:ROG) fell 4.3% in two days after slashing its fourth-quarter earnings guidance on Tuesday. Two months ago, the company guided investors to expect $82 million to $87 million in revenues. This month, the average of those two numbers is pretty much unchanged -- just narrowed a bit, to $84 million to $86 million now. Problem is, Rogers didn't stop at just firming up its sales numbers; it went on to guide analysts much, much lower than it had previously suggested on earnings. Whereas the company had expected $0.40 to $0.45 in diluted per-share profits back in October, it now thinks the number will be little better than half that: just $0.24 to $0.27 per diluted share.
The company, which makes a variety of products, ranging from silicon foams for shoe insoles to printed circuit board laminates used in cell phones, blamed oversupply of "high frequency printed circuit materials" among its customers for the lowering of its profits estimates. Customers are trying to reduce their overstocked inventories. Meanwhile, Rogers itself wants to burn through some of its own finished goods inventories. As the market gets flooded from all sides with these products, their prices are bound to fall, squeezing Rogers' margins in the process.
While the good news is that Rogers sees the decrease in profits as an essentially one-time event, and expects profits growth to get back on track after existing inventories have been cleared out, the bad news is that Rogers' valuation is going to look awfully steep until it gets things turned around. Judging from its trailing 12 months' results, the company has not been able to generate sufficient cash from operations to cover its capital expenditures for three of the past four quarters. But historically, that looks like an aberration, as Rogers has had positive free cash flow on an annual basis for the past four years.
Shareholders will be hoping that the company pulls a rabbit out of its hat and makes this year five for five. Right now, it doesn't look promising. But considering that this is a company that has achieved steadily positive free cash flow year in and year out for so long, long-term investors might want to take a hard look at this one if it takes a serious hit come earnings release time.
At Motley Fool Hidden Gems , while we don't fall madly, blindly, staggeringly punch-drunk in love with our picks, we do try to think long-term, and give proven winners a chance to work through short-term problems. Rogers hasn't yet made the grade and become an official "pick" yet, but we're going to give it the benefit of the doubt anyway -- for the time being. If you're interested in reading more about how this stock caught the eye of Hidden Gems author Tom Gardner, give the service a whirl with afree trialsubscription today.
Fool contributor Rich Smith has no position in any of the companies mentioned in this article.
