How's that for a title? You've got a little nautical Greek mythology, a little Led Zeppelin homage, all combined to highlight one point: The news from boat maker and Motley Fool Hidden Gems recommendation Marine Products (NYSE:MPX) yesterday bore a striking resemblance to its last report three months ago.
Back in April 2005, Marine Products had reported quite the mixed catch of fish. Sales were up, with profits up even higher. But then the (apparent) bad news blew in: Inventories were skyrocketing, and since inventories don't just pay for themselves, the cash diverted toward building them never made it into Marine Products' river of free cash flow.
Now we come to Q2. Once again, the most obvious results of Marine Products' operations last quarter have left the average investor seriously confused. How in heaven's name does a 20% rise in sales (vs. Q2 2004) and a 24% increase in net profits (likewise) add up to Wall Street dropping the stock more than 3%?
I have a hard time comprehending that myself, but my hunch is that Marine Products' stock got whacked for the same reasons that torpedoed it last quarter. Once again, free cash flow generation declined in comparison to the year-ago period, falling from $3.9 million then to $3.5 million now. All told, Marine Products generated $9.9 million in FCF in the first half of 2005, a 26% decline from 1H 2004.
Meanwhile, inventories climbed 28% higher than their year-ago amount, or 9% above last quarter's mark. Granted, CEO Rick Hubbell had an explanation ready. He attributed the higher inventories to higher levels of finished goods in dealer inventories, which were necessary to support the company's increased sales; and greater stockpiling of components to avoid anticipated component price hikes later this year.
To this Fool, both arguments sound reasonable and tally with what Hubbell told us about his company's inventory practices when Tom Gardner interviewed him last December. Clearly, however, Wall Street isn't buying the explanation. The pinstripe-and-wingtip crowd is seeing inventories rising faster than sales, and watching free cash flow dry up, and they're bailing out.
Should Fools jump overboard with them, or just pull up a deck chair and wave them bon voyage? It's hard to say. Earlier this year, we saw another Hidden Gems pick, Hooker Furniture (NASDAQ:HOFT), exhibit inventory and free cash flow problems similar to those Marine Products faces now, and Hooker's been struggling ever since. On the other hand, a third Hidden Gems selection, Stanley Furniture (NASDAQ:STLY), overcame its own inventory problems and returned to smooth sailing this quarter. Fools lured by this stock should wait to see which song Marine Products will sing.
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Fool contributor Rich Smith owns shares of Hooker Furniture but not of the other companies mentioned above. The Fool has a disclosure policy.
