You have to give FARO Technologies (NASDAQ:FARO) credit for one thing: It's persistent. The little manufacturer of factory measuring devices has disappointed Wall Street twice now -- first with its guidance in July, and a month later with its actual earnings numbers for the second quarter of 2005. Yet both times, the company gamely insisted that it would hit (at least the lower end of) its earlier-announced guidance for fiscal 2005.
For those who are keeping score, in order for FARO to earn its hoped-for $1.15 to $1.45 per diluted share, it will need to add $0.78 over the next two quarters to the $0.37 it has earned per share so far this year. Put another way, it will need to earn more in Q3 and Q4 each than it has already earned in the first and second quarters combined.
Not convinced FARO can do it? Neither am I. And neither are any of the five analysts currently following the company. For full-year 2005, analyst estimates range from $0.90 to $1.10 -- a whole nickel short of FARO's most subdued prediction. Worse, the average of the analysts' estimates is $0.97 for the year, which would make for an 8% decline in profits versus fiscal 2004.
So FARO has a tough row to hoe when it reports Q3 earnings Thursday. To have a shot at proving that its word is good, the company will need to do better than consensus estimates of $0.25 for the quarter. Merely "hitting its numbers" won't be good enough, because if that's the best the company can do, it will almost certainly feel the need to revise its fiscal 2005 forecast -- and I'm not talking about an upward revision.
It's hard to overemphasize the stakes that investors in this Motley Fool Hidden Gems pick are playing for tomorrow. If FARO succeeds in a big way, if it earns, say, $0.35 or so, the stock will skyrocket as hope revives that FARO knows what it's doing. If it fails, then the company will suffer a triple whammy:
- Failure to achieve its annual profits target will be all but certain.
- Management's credibility, in setting that target and twice insisting that it will be hit, will suffer.
- The inability to grow profits year over year will cast doubt on the company's forecasted growth rate, likely contracting FARO's earnings multiple.
I'd suggest laying off the caffeine this evening, Fools. It's going to be a long night.
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Fool contributor Rich Smith owns shares in FARO Technologies. The Fool has a disclosure policy.
