It happens to every company sooner or later: Wall Street sets a mark for quarterly earnings, and the company misses that goal. Sometimes, an earnings stumble is a signal to sell, but digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down. If you've been looking for big names in this column, you may have been disappointed lately. With earnings season in full swing once more, that should change right about now. Today, we get to literally dig in the dirt, take a couple of stripes off a general, and go nuts over bolts. Let's dig in.
Our first miscreant today is infrastructure construction specialist Shaw
Revenues were actually pretty good -- up 38% year over year to $1.23 billion, beating the analyst consensus target of $1.19 billion. So why the lower adjusted earnings, then? Management points to unexpectedly high costs in the performance-testing of a completed power plant project, and a canceled $100 million government contract didn't help, either. Then there's the new governmental practice of auditing project expenses before sending out payments (rather than the other way around), which led to $400 million of extra receivables on Shaw's balance sheet this quarter.
On top of that, the previous quarter's financial filings contained two substantial errors, forcing Shaw to revise that period's earnings down by $0.04 per share. The total effect of all of these issues has been a rather brutal mauling of the share price, dropping it 40% from its February high of $36.08.
Given all the company's problems, it might be a fair punishment. But revenues are rising quickly, with a healthy order backlog and rising inventory turnover as well; all of that points to smarter resource management. In addition, the Air Force signed an eight-year contract with Shaw worth at least $6 billion during the quarter, and I'm not sure that the market appreciated that deal properly.
Shaw might be a dog now -- or maybe a lion in disguise. Further due diligence is required, which is fine for me, since I can't buy the stock for 10 days after writing about it. I find the potential opportunity intriguing, and I'll certainly take another look. One final note: 86% of Shaw's revenue is generated by U.S. business, linking the company more tightly to the domestic economy than to global financial health. Invest accordingly.
At ease, General
The next underperformer is general media company Media General
Revenues of $230 million didn't meet expectations, either; analysts wanted to see $246 million, according to Thomson First Call. Still, the earnings were 3.3% higher than the year-ago period, led by an impressive increase in classified sales, particularly real estate. My hometown newspaper, the Tampa Tribune, is a Media General flagship publication, and this earnings release contained some numbers that gave me food for thought about the local economy. Real estate advertising in the Tribune more than doubled, while car sales were way down year over year, and "help wanted" ads lost 7.2%. Good thing I have a couple of jobs, and none of them in car sales.
Looking at the income statement, it seems that production costs were responsible for the missed earnings number, particularly the costs of producing, printing, and distributing the physical newspapers. But that division remains General's mainstay, bringing in the largest share of income and profits by far. TV broadcasting is higher margin but lower revenue, and the interactive segment (a.k.a. Internet operations) is the fastest-growing division but still runs at a net loss.
Media General is caught up in the general newspaper business malaise that has companies like General, Gannett
One washer short of a stud
Our last stray shot this week comes from industrial-supply manufacturer Fastenal
That's 20% year-on sales growth, which is nothing to sneeze at, particularly when coupled with expanding gross margins. Unfortunately, operational costs such as the price of the fuel required to haul tons upon tons of screws and washers to their retail destinations took back much of the gross margin expansion, leading to that missed mark.
Companies like Fastenal and Grainger
Some of these underperformers are victims of larger circumstances, while others might have only themselves to blame. It's up to you to decide which down-on-their-luck companies should be able to pull themselves up by the bootstraps and which really are stuck in the mud. Come back next Monday, and we'll take a look at another batch of mishaps and disappointments. It'll be fun and educational. Promise.
Further Foolishness that won't disappoint:
- One Fool thinks hard about the future for newsprint.
- Another Fool thinks Fastenal might fall in the "unfairly punished" category.
- Take cheap when you can get it.
Seeking great deals on unfairly punished stocks? Philip Durell and his merry band of Fools at the Motley Fool Inside Value newsletter service are standing by to help you find great stocks at ridiculously low markdowns. Try a 30-day trial subscription to see whether bargain-hunting is right for you.
Fool contributor Anders Bylund owns no stock in the companies discussed this week, but he took a break from writing this article to watch the news from Media General's biggest TV station. The Fool has an ironclad disclosure policy. The iron is probably bolted on with Fastenal parts.