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, it's one skeleton operation, a slightly mismanaged portfolio, and a disconnect somewhere in China.
Have you met Biomet?
If you need a new hip joint or have a broken spine in need of stabilizing, Biomet
Management said the shortfall was due to slow sales of spinal hardware products. But the miss was slight, and strengths in other areas nearly made up for that weak product segment. I'm more concerned about the Department of Justice's antitrust investigation of the company. And Biomet isn't alone -- the DOJ probe encompasses almost the entire industry of medical implant makers, including the orthopedic divisions of Stryker
Until that investigation is closed or concluded one way or another, it's hard to make a call on Biomet's prospects. The DOJ has been known to bring down hefty fines and force serious changes to business models and practices for antitrust infractions (see: Gates, Bill; 1998-ongoing), and that's enough to make me stay away from the stock until further notice. Yes, even in the face of an aging baby boomer generation, and even despite Biomet takeover speculation. It doesn't help one bit that the company's CEO for the past 29 years left his post six months ago, either.
Not one for the ages
Let's move on to our second slacker this week, financial services company A.G. Edwards
Total client assets under management grew by 9% year over year to $354 billion, and asset management and service fees rose a respectable 18% to $305 million. The miss can be pinned on 5% lower commission revenues, which an honest Fool really should applaud, since it means that A.G. Edwards put its customers through less portfolio churn than last year. It's the right thing to do for the sake of its clients, though it makes the income statement look weak.
Then again, management keeps stressing its customer focus at every opportunity, so it looks as if these guys are walking the talk, so to speak. Recent announcements include a joint venture with Wells Fargo
3Com si, 3Com ca
That brings us to the last miscreant of the week -- network equipment and software maker 3Com
Of course, you could back out $0.04 per share in restructuring, stock-based compensation, and amortization expenses and end up beating estimates, but where's the fun in that? The expenses are real, and the Fool fought for stock-based expense reporting for a reason.
I'd rather focus on 3Com's growth, which rests largely on raising its stake in a joint venture with privately held Chinese competitor Huawei to 51%, making the venture a reportable operating segment. The division contributed $12 million in operating income, which helped reduce the overall operating loss to $26 million from $47 million one year ago.
Looking over the operating expenses, I'm impressed by the fiscal discipline they show. The only line items that rose faster than sales were amortization of intangibles -- a somewhat nebulous category -- which rose from $3.9 million last year to $12.2 million now, and research and development, which jumped up by $26.6 million to $47.8 million. You all know how much I love tech companies that invest in R&D, and this is no exception. If 3Com had kept its R&D flat with the year-ago period, it would have reported a net profit of about $12 million, or $0.03 per share, but it chose to keep the pedal to the metal instead. I'm perfectly fine with that.
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:
- Read up on Biomet's legal troubles.
- We have five questions to ask your financial advisor.
- Is 3Com really one of the worst stocks on the market?
- 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. Johnson & Johnson, on the other hand, is an Income Investor pick.
Fool contributor Anders Bylund holds no position in the companies discussed this week, but his mother is on her fourth hip replacement already. The Fool has a disclosure policy, and you can see his current holdings for yourself.