On Friday, Motley Fool Hidden Gems Watch List stock ScanSource (NASDAQ:SCSC) suffered its second major sell-off this year, and once again, forward guidance was the culprit.
Investors in this value-added reseller of AIDC (automatic identification and data capture) and POS (point of sale) systems will recall the April crash that greeted the company's downward revision of third-quarter earnings estimates (as fellow Fool David Meier's article described here.) Just as in April, Friday's decline -- this one a 15% drop -- seems to have been sparked by the unhappy picture that ScanSource painted for its fiscal first quarter of 2006.
When you look at how the company actually performed in the quarter just ended -- blowing away consensus estimates for fiscal Q4 2005 -- there's just no other explanation for why the Street is now dissing this stock. Analysts had been expecting ScanSource to report $0.68 per share in profits on $378 million in revenues in fiscal Q4. In fact, the company posted $381.2 million in revenues and profits of $0.73 per share. Significantly, the extra nickel in profits reflects not the declining profitability that Wall Street had predicted, but rather a modest 6% increase in earnings over last year's Q4 profits of $0.69.
The bad news was that ScanSource projected a fiscal Q1 2006 revenue range between $360 million and $385 million, far short of consensus expectations of $400.6 million for next quarter. In Wall Street's view, that 4%-10% revenue shortfall over the next three months made the company 15% less valuable on Friday morning than it had been on Thursday evening.
On the face of it, that doesn't sound particularly logical on Wall Street's part. But as a Hidden Gems subscriber, I'm not complaining. On the contrary, I like it when the professionals overreact to unexpected bad news from a profitable, growing, misunderstood small company. When they knock a company's stock price down for little reason, they're just making the individual investor's job of earning excess returns a little easier. And what's not to like about that?
And with ScanSource now trading at a P/E of 16.2 -- lower than its rate of return on equity (18%), its recent rate of annual income growth (19%), and its rate of annual revenue growth (23%) -- this company is rapidly approaching a price at which investors can earn those kinds of returns.
To which this Fool can only say: Thank you, Mr. Market. May we have another?
Fool contributor Rich Smith does not currently own shares of ScanSource.
