Shares of InFocus (NASDAQ:INFS) were thumped by about 14% on Monday after the company gave disappointing preliminary results for the quarter ending March 31. I found the announcement interesting because InFocus is a company that I looked at as a possible investment about two years ago. I decided against buying shares and then kicked myself as I watched the share price triple. Now, at about $4.70 per stub, it's back down to where it was when I first considered purchasing shares. It's been a round-trip that none of its investors needed, I'm sure.

InFocus makes projectors that are compatible with computers and other video sources, as well as liquid crystal (LCD) and digital light processing (DLP) displays. It seems like this should be a booming business, because projectors and fancy TVs are popping up everywhere.

Can you guess what the problem is?

Well, a quick look at the front page of has links to reviews of projectors made by at least 12 different companies including such big boys as 3M (NYSE:MMM), Canon (NYSE:CAJ), Dell (NASDAQ:DELL), and Panasonic. Too much competition is killing profit margins in this business, and the lack of any discernible competitive advantage is what kept me from putting my money on InFocus a couple years ago.

Yesterday's announcement shows that it is not just the share price that has round-tripped. Gross margins have done it also. Gross margins were more than 20% during 2000-2002 but then dropped to just 9.8% in 2003. 2004 showed much improvement with gross margins reaching 18%, but for the quarter ending March 31 the press release states that they will fall to around 7% or 8%.

Investors shouldn't have been all that surprised with this news. The 10K that was filed on March 4 showed that inventories had ballooned to $155 million at the end of December from only $62 million the previous December. This is a gargantuan increase compared with the anemic 7.5% rise in sales. Projectors must have been scattered like confetti in the warehouse. Ideally you like to see inventories increase at about the same rate as sales. It looks to me like InFocus decided it needed to get its inventory under control and had to cut prices to do it, resulting in low gross margins. It worked, to an extent, because yesterday's press release states that inventories did fall by around $27 million.

With stiff competition and still high inventories, the share price of InFocus is too rich for me even after the recent drop. While the competition and bloated inventories make this a great time to buy an InFocus projector, it is not such a great time to buy InFocus shares.

Fool contributor Dan Bloom may be in the market for an InFocus projector in about six months. He doesn't own shares of any company mentioned in this article.