It happens to every company sooner or later: Wall Street sets a mark for quarterly earnings, and the company misses the 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 where the chips fell, try to keep up with the Joneses, and raise a banner -- or six -- for tomorrow.
But it wasn't a rock. It was rock bottom!
Our first disappointment today comes all the way from China, where semiconductor foundry Semiconductor Manufacturing International
A few things are at work here. First of all, it's tough to make a decent living when you start with an 8.9% gross margin. It would take a master of cost control, the likes of which have never been seen, to make that work. Second, foreign-exchange losses of $12.3 million can explain the analyst shortfall. And interest expense, net of interest income, dropped by another $2.2 million.
But ultimately, SMI is simply lagging behind the competition technologically. As a result, its products become more expensive to make while customers still want competitive prices, which they can get thanks to greater efficiencies at other foundries. For example, SMI just started to produce 90-nanometer chips; they contribute about 5% of the company's revenues. But all three of its major competitors -- Taiwan Semiconductor Manufacturing
That's just not cool. Smaller traces are attractive for a couple of reasons: You can cram more chips onto one wafer of production silicon, and customers demand faster and more power-frugal chips. Chang goes on to say that "we will continue to march ahead toward the leading-edge technology frontier," but it's a long walk right now, and it seems as if the company may have tried to cheat a bit in the past.
Even worse, Taiwan Semi is suing SMI for basically stealing the technology it uses for 180 nm, 130 nm, and 90 nm fabrication. Of course, SMI says it is innocent and that the technology in question was properly licensed from Chartered and Motorola
Mr. Jones and me, stumbling through the barrio
Let's move on to alternative bottled-soda producer Jones Soda
One penny of the shortfall can be explained by $187,100 of stock-based compensation expenses, but the rest comes from, in the words of CEO Peter van Stolk, "our strategic decision to focus on the launch of our cans, which is slated for the first quarter of 2007. The additional investments in this new operating platform [are] critical prior to the launch to ensure our future growth plans are achieved."
You may have seen the company's canned drinks already; Jones has shipped them to Target for two years now. After seeing the success of that program, the company now feels ready to enter the national canned-soda market, which van Stolk estimates to be worth $58 billion. Jones signed a five-year distribution and manufacturing contract with National Beverage
If anything, it mitigates what I thought was the worst threat to Jones' business: Target's store brands taking the offbeat soda peddler's place. OK, so Archer Farms doesn't bottle Turkey and Gravy -- yet -- but you can get some decidedly unusual flavors from that brand these days, like Sarsaparilla or Blood Orange Italian Soda. However, with some tasty 12-packs of Jones Green Apple ready to roll out on the shelves of supermarkets and gas stations other than Target, the company is dividing its eggs up among a few more baskets. Jones isn't cheap these days, but the disappointing report barely made a dent in the stock chart, and in the absence of substantial bad news, it might never look this cheap again, comparatively speaking. Due diligence required, as always.
The amusement park rises bold and stark
We'll end this whirlwind tour of underperformances at Six Flags
That flattish revenue development isn't actually all that bad, considering that attendance dropped 12% and Six Flags made up the difference through higher spending per park guest. CEO Mark Shapiro lamented bad weather and reduced media attention, but also pointed out that this is a "transitional year" for Six Flags and that the company is executing on its turnaround plan. The increased per-family spending is a testament to attractive parks and that elusive trust Shapiro is hoping to rebuild.
The stock is trading cheaply, at just over half of trailing sales, though there are some good reasons for that. Nine of Six Flags' 30 parks are for sale, in an attempt to focus on the company's strongest parks, remove some debt from the balance sheet, and return value to shareholders. If any of the offers already received make sense, the sale or sales will be announced in December. Of course, the winter is the perfect time for major theme-park overhauls, since the October-to-March period generates only about 14% of the parks' annual revenues. Unloading a few of its own underperforming assets should give operating margins an immediate boost, and maybe then the share price will follow.
Tune in. Turn on. Rock out!
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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Fool contributor Anders Bylund is a Taiwan Semiconductor shareholder, but holds no other position in the companies discussed this week. He'll buy himself a gray guitar and play. The Fool has a disclosure policy, and you can see his current holdings for yourself.