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. Today, a return customer pays a visit, followed by an anonymous guest, and then one whose work you've probably seen but never identified.
Peering at the pier
I'm really not out looking for repeat offenders here, but sometimes habitual underperformers need to be highlighted. This week, I'm talking about home-furnishings retailer Pier 1 Imports
To be fair, Pier 1's management has delivered on some of its promises. Back in January, the executive team admitted that its wares had gone out of style, and promised to lower store-level inventories by about 15% in order to improve the company's ability to change with the times. Inventories today are indeed 14.9% lower than last year, but the plan hasn't translated into better sales yet.
Tag -- you're it!
Our next stumbler is industrial tag specialist Brady Corporation
Don't worry if you've never heard of Brady. You're not likely to see many companies with nearly $2 billion market caps more obscure than this. The company certainly meets the "boring industry" Peter Lynch criterion, and the company's name would probably appeal to Peter's obscurity-loving side, too. Providing the nuts and bolts to other businesses just isn't sexy. It's somewhat surprising to see that as many as five analysts follow the company anyway.
That is, until you start paying attention to Brady's performance. Trailing net margins have remained steady at 10% for two years running, up from 3.9% in 2003, while revenue has grown at least 21% annually since that year. It's true that most of the revenue growth has come through acquisitions, but 8% organic sales growth is nothing to sneeze at. Brady is expanding into new markets like India, China, and Slovakia, and management says tells us to expect another year of 25% revenue growth. This near-miss performance looks like a mere bump in the road to this observer.
Use the Source, Luke
That brings us to our last example of overpromising and underdelivering this week, Source Interlink Companies
If you've ever wondered who keeps supermarkets, gas stations, and bookstores stocked with magazines, CDs, and DVDs, Source Interlink is pretty much it -- at least if you want to invest in that middleman. Most of its competitors of any significance are privately held. The same can't be said for its customers, however. The company is a significant link in the supply chain for A-list businesses like Barnes & Noble
The drop in CD and DVD sales might not come as much of a surprise, given the slow but steady move toward digital music sales and away from traditional CDs. On the other hand, magazine publishers are supposed to suffer from Web-related illnesses as well, right? Yet that segment increased sales by 34% over last year. But of course, there's a logical explanation.
Source Interlink's secret sauce is the acquisition of a couple of large service areas in Southern California and the Washington, D.C., area from closely held competitor Anderson News. The deal cost Source $13 million, plus $26.6 million of debt repayments, with another $14.3 million of promissory notes issued to cover the remaining debt of the acquired businesses. The new service areas ran about $250 million of sales last year, and although management says that the additions shouldn't be expected to contribute at full speed yet, the deal should represent most of the magazine division's sales boost.
I can't imagine investing in a company that derives half of its sales from shipping physical CD and DVD discs around the country. We're just at the beginning of the all-digital revolution in entertainment, and although the digital business model will take a few years to fully blossom, I'm afraid physical media is doomed to extinction sooner rather than later. In five or six years, the CD may seem as quaintly obsolete to us as a vinyl album or cassette tape does today, and the DVD is only a few years behind on that downward curve. You heard it here pretty early in the process. And Source Interlink is one of the middlemen you're eliminating when you download an album or a movie, or read Newsweek online.
That's all, y'all!
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 Foolish reading:
- There's virtue in value.
- Learn how to buy low and sell high.
- Obscure companies can make great investments.
- Take cheap when you can get it.
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Fool contributor Anders Bylund holds no position in the companies discussed this week, and he hasn't bought a magazine in retail for years. The Fool has a disclosure policy, and you can see his current holdings for yourself.