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're taking a look back at the first three quarters of this column, a retrospective of misses past. The greatest hits include some heavy machinery, all the memory you could handle, and some futuristic terrorist-tracking. Let's have a look-see.
The very hungry Caterpillar
Back in October, Dow component Caterpillar
So what happened? A legal settlement with truck maker Navistar, for which Caterpillar makes engines, took a bite out of earnings, and the rest fell to higher manufacturing costs. More troubling, management said that it saw a macroeconomic slowdown coming in 2007, which put a damper on future expectations.
It wasn't really that bad a quarter, with 21% year-over-year earnings growth, but the market wanted more, and the stock price dropped like a rock. Caterpillar still lingers in that lower trading range today, so it's not too late if you want to grab some shares of the big Cat on sale. The next earnings report is due in about three weeks, and that's when we'll start to see whether this shortfall was a one-time stumble or a deeper malaise. I still believe in what I said about the company's prospects back in October:
"Caterpillar is for you if your investment horizon goes beyond the next few quarters and into the next decade. Even if earnings shrink a bit, Caterpillar has a solid income stream and massive cash flows. Management feels confident enough in the company's future to carry on with a generous share repurchase program, as well as a 20% dividend boost earlier this year. It's hard to find anything fundamentally wrong here."
The world needs wannabes
Next at bat is memory and consumer-electronics maker Micron Technology
Micron bought Lexar, a maker of consumer gadgets, presumably to be more like SanDisk
At the time, I had concerns about this strategy shift away from memory products and into direct competition with Apple:
"I'm not so sure that this is the right time to move out of the computer memory field. Microsoft
Now we have the server versions of Vista on shelves, but we are still waiting for the consumer editions. Apple keeps delivering great results amid damage control on its stock-options scandal, but SanDisk proved mortal after all, not to mention just as susceptible to pricing issues as Micron is. When Micron reports its holiday quarter in the next few weeks, we'll see how the company held up at a time when semiconductor companies lowered their targets all around it. My guess: not too well.
The company with the X-Ray eyes
The last 2006 misstep we'll revisit today is American Science & Engineering
The May miss was largely due to a major shift in the valuation of the company's outstanding warrants. That's certainly a valid concern, but it's a rather obscure line item that many investors have never thought about. If you backed that charge out, you would have seen pro forma income comfortably above estimates. And as I said back then, backing that number out makes this company a lot easier to understand:
"Warrants are a form of stock options, and it can be hard to predict the gyrations of options values and expirations. I'd feel safer if the company reduced its exposure to unpredictable market changes, but if that's the worst problem on board this ship, it still looks seaworthy."
Indeed, despite the additional drop over the summer, American Science appears to be back on track with a fine report in November. The stock is now trading 7% higher than when I penned (OK, keyed) that piece. As fellow Fool Rich Smith pointed out over the summer, this stock highlights the short-term thinking of the market at large, and it invites us to buy and sell on the large price drops and rocket boosts that come from even small news. But the stock remains a five-star CAPS issue, and the company is still a Motley Fool Rule Breakers recommendation. I still think this boat can float.
New year, new misses
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 a fresh batch of mishaps and disappointments. It'll be fun and educational.
Further Foolish reading:
- The Best Small Cap for 2007: American Science & Engineering
- Cat Scratches
- How to Get Stinkin' Rich
- Buy Before It's Too Late
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. Both Intel and Microsoft are official Inside Value picks today. Try a30-day trial subscriptionto see whether bargain-hunting is right for you.
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