Inquiring Fools want to know: Has Wall Street gone bonkers?
Yesterday, home-fixture maker American Standard (NYSE:ASD) put up some apparently fabulous numbers:
- 7% sales growth from the same period a year ago. (Give 'em a break. They're selling toilets, you know -- this isn't a fast-growth business.)
- 30% net profits growth. (But it is profitable.)
- 16% earnings growth, if you back out tax benefits and restructuring expenses.
I tend to be wary of companies qualifying their net profits with "adjusted" or "pro forma" (business for "caveat emptor") numbers. But in American Standard's case, the company's not trying to hide bad news. On the contrary, it's going out of its way to explain that it didn't really grow profits four times as fast as sales ... just twice as fast. Horrors.
What's more, while you can never be entirely certain what numbers the analysts are looking at when they toss out their earnings estimates, we do know that the analysts polled by First Call expected American Standard to report $0.86 per share in some flavor of profits. Compare that number with the company's actual earnings of $0.95 in net profits, or $0.88 in "adjusted profits," and either way, the company beat the Street.
Yet the Street didn't cheer American Standard's stock on to new highs. On the contrary, investors bid the stock down more than 1% on a generally up day for stocks. Why?
Guidance didn't seem to be the problem. American Standard reaffirmed previous guidance of $2.60-$2.75 per diluted share for fiscal 2005. Thus, thanks to last year's asbestos litigation-related charge (read about that one here), American Standard is looking to earn 83% to 94% more this year than last. Back out that charge, and the "adjusted" -- there's that word again -- number should be a still-respectable 16% to 23% bump upwards.
So after searching diligently for what red flag might have spooked Wall Street's bulls, I'm beginning to suspect that the trouble is with American Standard's inventories. Overall, they're up more than 18% year over year. More significant, though, is the type of inventory building up. Raw-materials inventories increased less quickly than did finished goods; work in progress inventories actually declined over the past six months.
While it's impossible to judge for certain from a single quarter's results, what this seems to suggest is that goods are piling up unsold, that the company is consequently slowing the production of new goods out of a fear that they won't sell, and that it's ordering fewer components for the same reason. In addition, the struggling bath segment, with a 60% decline in net income in the quarter over last year and a decreasing free cash flow (despite the company's promise to raise year-over-year FCF by 10%), probably didn't help the market's attitude, either.
I think it's too soon to draw a firm conclusion, but it is possible that Wall Street's reaction to American Standard's otherwise super performance may not be as crazy as it seems.
Want to read more about kitchen and bath fixtures? Go wild:
Fool contributor Rich Smith has no position in any of the companies mentioned in this article.
