There's no use trying to dress up or wax poetic about the third-quarter results that Motley Fool Hidden Gems selection CNS (NASDAQ:CNXS) turned in last night, because while the results weren't terrible, there's not much to be excited about.
As my colleague Rich Smith highlighted on Tuesday, analysts were expecting earnings per diluted share of $0.28 a share, which was $0.02 below last year's $0.30 a share. In fact, CNS reported only $0.26 per share, which -- you guessed it -- is a $0.02 miss. On a year-over-year basis, that's a decline in earnings of 13.3%. In its earnings release, the company points out that last year's results included a $0.05 benefit from a European duty refund. Taking the one-time item out of last year's results means that earnings in this year's third quarter grew by a penny per share, or 4%.
Despite the earnings miss, the company still believes it will hit full-year earnings results of $1.05 to $1.12 per share. Through the first three quarters of fiscal 2006, the company has already delivered $0.83 per diluted share, which means the company needs to come up with another $0.22 to $0.29 to hit its goal. Last year's fourth-quarter earnings were $0.28 a share, which makes the company's goal appear to be quite achievable. In effect, the company is forecasting that its second-half earnings growth will be flat. For all of last year, the company earned $0.92 per diluted share. So while the second half of fiscal 2006 will be flat, the company still expects double-digit earnings growth in the 14% to 21% range for the full year, but the decelerating earnings trend is concerning.
Also of concern is that while sales and earnings growth have decelerated, inventory levels remain fairly lofty. Compared to sales growth of 7.6% versus a year ago, the company's inventories have ballooned by 65%. Inventories are down 10% from the third quarter's $8 million, and some of the bloat is likely due to the company's pending launch of two new Fiber Choice products. Still, the bulk-up in inventory at a time when growth is slowing is concerning, and I've recently noticed that my local Costco Wholesale (NASDAQ:COST) has added an instant manufacturer's rebate on the company's Breathe Right strips.
Given today's 19.8% haircut, the shares look fairly valued assuming the company will deliver the 10% to 15%earnings growth promised for fiscal 2007. For good reason, the market is a bit concerned as to whether the company can hit its goals. Even great companies like Intel (NASDAQ:INTC), Dell (NASDAQ:DELL), and Procter & Gamble (NYSE:PG) have had growth hiccups on the path to greatness. The question is whether CNS is worth holding onto through its stumbles. Thus far, I'm inclined to say yes, because the price premium to the company's 10% to 15% long-term growth estimate appears to have already been taken out of the shares.
CNS is a Motley Fool Hidden Gems recommendation. Both Dell and Costco Wholesale are Motley Fool Stock Advisor recommendations.
Nathan Parmelee has a beneficial interest in shares of CNS and owns shares of Costco Wholesale. He has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
