It happens to every company sooner or later: Somebody sets a mark for quarterly earnings or monthly sales numbers, and the company misses that goal. Whether the target was set by the company's own management, by Wall Street analysts, or by the market at large, that miss can have serious consequences. 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 have a banker and a builder sharing an uncomfortable bed, and a connector specialist that can't quite connect.
Not so popular after all
For our first miscreant this time, I'm going to Puerto Rico. Banco Popular
CEO Richard Carrion said, "This has not been a good year, primarily because of the performance of our nonprime mortgage operations, but we have taken action on this front." That action includes exiting the mainland American subprime mortgage market and refocusing those assets on profitable segments. Carrion beamed over better-than-expected results in the hometown Puertoriqueno market, despite a tough environment.
The company's geographical and operational diversity will see it through this rough patch in one isolated area -- the mortgage field. That's good to know, but when mortgage losses put such a serious hurt on a diversified operation like Popular, it makes you wonder what will happen to more specialized mortgage lenders like NovaStar Financial
If you're reinvesting those juicy dividends, I guess it doesn't hurt to see a few years of negative stock returns, as you'll just get more shares for your money. The trick is to make sure that the company survives and can afford its payouts in the future. But I digress -- Banco Popular has a plan ready to go, and it should rebound from this extraordinary confluence of unfortunate events, thanks to its broad base of operations in more than one sense. Next song, please.
But we're not leaving the housing market's woes quite yet. Next up is homebuilder Lennar
CEO Stuart Miller says that Lennar should be able to meet or beat the 2006 net earnings in 2007, with a few caveats. He needs a stable job market, a healthy economy, and no further interest rate increases, as well as "traditional, seasonal" growth patterns in the new-home market. "Underlying this goal is clearly a little bit of Scotch tape and Band-Aid," he said, calling the flat 2007 earnings figure a goal rather than guidance.
That's a lot of ifs and buts, and hardly a conservative basis for an operating forecast. The market gave Lennar's stock price -- along with that of peers like KB Home
Enough with the mortgages already!
Okay, let's round this diatribe off with a little-known, yet ubiquitous, maker of electronic hardware. Molex
Brand name aside, the company reported a decent quarter, with $0.05 per-share earnings growth to $0.36, and 20% revenue growth to $838 million. But Wall Street wanted more, and Molex missed the consensus income target by $0.01 per share.
Margins came in weaker than expected, and some large customers decided to hold back on their order volumes in the quarter. Yep, we're looking at the unfavorable product mix in the cell-phone sector again. Molex provides components for those handsets, too. CEO Martin Slark is unfazed by these short-term bumps in the road, though. "We are addressing these short-term challenges while continuing to move forward on several positive longer-term initiatives," he said. "Our competitive position and new product development remain strong, and we are confident in our ability to continue to gain market share."
The right focus for any serious business should be several years out -- not in the next quarter or two. Slark's comments leave me with a sense that he has a long-term plan in mind, and is willing to take the occasional near-term earnings and revenue hit to reach his larger aspirations.
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:
- Hunting for the Next Dividend Winner
- How NOT to Crush the Market
- Welcome to the Losers' Club
- Buy Before It's Too Late
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Fool contributor Anders Bylund is still a reluctant NovaStar shareholder, but holds no other position in the companies discussed this week. He did once own a Centex-built home. Banco Popular is an Income Investor pick. The Fool has a disclosure policy, and you can see Anders' current holdings for yourself.