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, I'm thinking about a home entertainment center, taking a few classes, and going out with a bang.
Tweet, tweet, little birdie
I'll go with niche retailer Tweeter
That's a narrower deficit than the $0.81 reported a year ago. Management blamed the flimsy results, including a 13% decline in same-store sales, on price drops on flat-panel displays like LCD and plasma television sets. That takes a bite out of Tweeter's projection-screen specialty, and although the company does sell plasma sets and LCDs as well, margins on those products are going south on the fast train.
While operational results were nothing to write home about, management did feel good about its balance sheet management. During the just-completed fiscal 2006, debt was reduced by $17 million, while capital expenditures made for a $20 million annual expense.
As fellow Fool Rick Munarriz pointed out, the root of Tweeter's problems is that it isn't Best Buy
It's a long downhill slide in Tweeter's rearview mirror. I'm not entirely sure that shareholders wouldn't be better served by selling the company off -- either piece by piece or to the highest bidder. If this is a turnaround story, now would be a good time to make that U-turn.
Get your learn on
Let's move on to our next underperformer, automotive technician trainer Universal Technical Institute
Company officials blamed the drop in profit on higher operating costs, capacity utilization of just 64.8% versus 73.4% last year, and $1.1 million of costs in a headcount-reduction move. Average undergraduate enrollment in the quarter was nearly flat over the previous year, at 16,278.
With all of that excess capacity, the layoffs seem necessary. The company is also increasing its ad spending to drive a few more students to its programs. It will take a couple of years to recoup these costs, but UTI should be in much better shape by 2008 or so. Tom Gardner's reasons for picking this stock for newsletter subscribers are still valid, says analyst Jim Gillies, and I'm inclined to agree. What are those reasons, you say? Take a free, 30-day trial to our small-cap service to find out what makes UTI a better investment than rivals like Corinthian Colleges
Bang and blame
Hands up! Our last miscreant this week is handgun maker Smith & Wesson
It's not often you see a company disappointing the Street with a mere tripling of net income, but here it is. The stock was priced for perfection before the 16% haircut imposed by this earnings news, and the P/E remains stratospheric at about 53 times trailing earnings today. The company is leaning on orders from police and military forces to drive those expectations with a range of new products like polymer .45 pistols for police work and an entirely new manufacturing plant for "long guns," such as rifles and shotguns.
Recent quarters have been a rather bumpy ride on the bottom line, though trailing revenue growth has continued to accelerate. For a company with 154 years of operational history under its belt, that's quite an impressive growth trend. But it's hard to justify dot-com-bubblish valuations like this one, and some observers feel that Rule Breakers selection TASER
This looks like a fine business, only one that's seriously overvalued today. At some point, that valuation is bound to reconnect with reality. Last week's adjustment wasn't nearly enough.
Lock and load
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.
Further Foolish reading:
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. Best Buy is a Stock Advisor recommendation, TASER is a Rule Breaker, and UTI is a Motley Fool Hidden Gems selection.
Fool contributor Anders Bylund holds no position in the companies discussed this week, and he doesn't even own a gun. The Fool has a disclosure policy, and you can see his current holdings for yourself.