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, we'll see a rusty steelworker, an emperor without cheap clothes, and a programmer facing code revisions. Let's dig in.
Worth a ton of what?
Steel processor Worthington Industries
The good news is that these numbers show impressive growth over last year, when Worthington reported $0.32 in EPS on $694 million in sales. Operating income doubled from $27.5 million to $54.7 million, and at 15.6%, trailing-12-month gross margins are at a two-year high. So, everything is going great, right? Well, not exactly.
Two of Worthington's three business segments cater to troubled markets, namely commercial construction and car production. With the slowing housing market on top of production cuts at big customers like Ford
Steel prices are rising thanks to massive international demand, but with domestic steel customers under the heel of their own pressures, it's hard for an American manufacturer of (primarily) metal to profit from the pricing trend. Companies like Worthington might be worth a look if you want to jump into a cyclical industry at a low point in the cycle, but you'll need nerves of steel and a long-term investment horizon to enjoy that ride.
I don't have the heart, Mark
Let's move on to the next miscreant -- menswear specialist Hartmarx
Management is pinning the shortfall on the consolidation and ownership changes in the department store industry, which has disrupted Hartmarx's shipments and sales of the company's bread-and-butter mid-priced menswear products. Rather than complain about unfavorable business conditions, the company is doing something about it. To reduce the reliance on mainstream department store sales, Hartmarx is working on moving up to snazzier, higher-margin luxury brands sold in higher-end stores like Saks Fifth Avenue and Neiman Marcus.
Management is cutting underperforming brands, which hurts revenues and earnings in the near term but should create a stronger market position in the long run. You can tell from the results that there's a real commitment to this strategy, as revenues have dropped 9.5% year over year, at least partly because of the retreat out of department store brands, and SG&A expenses shot up 17.5% over the same period, thanks to restructuring costs associated with production facility closings.
The stock has taken a beating, and Hartmarx is snapping up shares through a generous repurchase program. If the operational improvement plan works out as intended, this stock could be a deep value today. But the fashion industry is notoriously fickle, and there are no guarantees.
A spin on Aspen
It's time to round off this sordid list, and this week, niche-market enterprise software maker Aspen Technology
Neither this quarter's earnings nor last year's are uncomplicated figures, however. In 2005, the fourth quarter included $3.3 million, or $0.06 per share, in restructuring charges versus just $265,000 this time around. On the other hand, the latest quarter suffered a $0.03 per-share charge from payroll taxes, thanks to an extensive internal review of stock option granting practices.
That review found inappropriate grant dates stretching back as far as 1995, and resulted in restatements that reduced earnings for the first three quarters of 2006 by $1 million, for fiscal 2005 by $0.5 million, and for 2004 by $7.2 million. In most cases, review results like that will get a few management heads rolling, but nothing of that sort has been reported for Aspen yet.
Maybe that's because this executive team seems to be doing a fine job of getting the business shipshape. Operating expenses dropped by a staggering 33% from last year while revenues grew 17%, all the while competing against companies with much greater resources such as SAP AG
Leaving so soon?
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.
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