These three companies just didn't live up to Mr. Market's expectations last week. 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. This week, an evergreen turns blue, a creditor can't quite manage, and a shipper gets lost in the mist.
On the sunny side of the street
Our first miscreant this week is solar-power entrepreneur Evergreen Solar (NASDAQ:ESLR). The average analyst expected a $0.07 loss per share, but the company tacked on another red penny to that figure. As for management's revenue and margin goals, performance was on target, albeit on the low side of the ranges forecast.
Evergreen has exited the development stage and now pulls in all of its revenue from commercial sales rather than research contracts. Have a look at selected results from the latest four quarters:
|
(In Millions) |
4/2006 |
7/2006 |
9/2006 |
12/2006 |
|---|---|---|---|---|
|
Revenue |
$11.9 |
$22.4 |
$36.4 |
$32.4 |
|
Gross Income |
($1.3) |
$1.1 |
$5.8 |
$6.8 |
|
Net Income |
($8.1) |
($7.5) |
($5.6) |
($5.5) |
|
R&D |
$4.5 |
$4.3 |
$4.9 |
$6.3 |
Sales have started to take off, though net income remains elusive. Then again, quarterly R&D expenses have grown 38% since the first quarter, and a whopping 83% over the past year. We don't have cash flow figures for the fourth quarter yet, but capital expenditures tend to be more than $20 million per quarter, as Evergreen builds out its manufacturing capacity. That includes a $70 million stake in EverQ, a manufacturing facility shared with two partners, German solar cell designer Q-Cells AG and Norwegian counterpart REC.
I say these are perfectly acceptable uses for the growing gross income and that earnings will have to wait 'til later. On the other hand, this is by no means a slam-dunk winner. Alternative energy is a fast-growing field, and Evergreen is probably wise to stake out as large a claim as possible in this virgin ground.
But there are no guarantees that its "thin ribbon" solar cells will in fact gain a significant foothold in the market, and you better be prepared for a bumpy ride, and possibly even a total loss, if you park your cash in these shares. It's a high-risk, high-reward gamble, and more speculative than even this Rule Breakers fan can stomach right now. This quarter's results didn't scare me, but I'd like some more meat on these bones.
Sublime subprime?
Moving on, there's subprime credit specialist CompuCredit (NASDAQ:CCRT), which reported "managed earnings" of $0.40 per share, while Wall Street had wanted $0.42 per share. That take matched management's lowered guidance from Jan. 8, and of course that's 20% below the original $0.50 official forecast. It was a slightly chunkier bite than the $0.36 per share earned last year.
CompuCredit's managed earnings metrics treat the company's securitized portfolios as if they had never been converted into bonds and other tradable securities. It's a non-GAAP measure intended to clarify operational results, and it normally comes out looking much better than GAAP earnings. This time, standard net income stopped at $0.19 per share, up from $0.06 a year ago.
Management pinned the underperformance on more marketing, expensive new technology, slow auto loan sales, and depreciation charges related to moving the company's headquarters. Interestingly, they did not blame charitable contributions, though that accounted for $15 million of the quarter's operational costs. That's pretty hefty next to the $9.7 million GAAP earnings, or $19.9 million of managed earnings.
That corporate generosity, at the expense of Street-friendly earnings, jives very well with management's shareholder-friendly practices. This risky lender has earned a spot on our Motley Fool Stock Advisor scorecard, not least thanks to its leaders' sincerity in taking care of its often-underprivileged customers. They take care of shareholders too -- anything less would be silly, since management owns 60% of the company.
Subprime lenders in general, like NovaStar Financial (NYSE:NFI) and New Century Financial (NYSE:NEW), are courting losses and skirting disaster these days. My Foolish colleague Emil Lee recently got some insights about CompuCredit out of hedge fund manager Tom Lee (no relation). It's a great primer on this company, so go and check it out. You might come away with a newfound appreciation for the company's unique place in the industry.
Cold, hard logistics
This might be the most upbeat "3 Misses" to date. Our third and final entry is Expeditors International of Washington (NASDAQ:EXPD), a shipping and logistics firm that reported earnings of $0.28 per share, three cents below Wall Street's expectations and down from $0.34 a year ago.
CEO Peter Rose shrugged off the disappointment, saying that he'll "take these fourth-quarter results, particularly given the rather stiff comparisons we were up against."
That's true enough; last year's comparable quarter produced a 7.3% net margin, which is almost unheard of in the logistic sector. Even if you back out a one-time domestic reinvestment tax credit of $21.6 million, or $0.10 per share, Expeditors produced a solid 5% net margin, still tops in the industry. Comparable companies like CH Robinson Worldwide (NASDAQ:CHRW) and EGL (NASDAQ:EAGL) would sell their hubcaps for operational efficiency like Expeditors'.
The more I read about this company, the more I like it. Management has the right attitude to its successes and failures, always ready to credit its employees while shouldering the guilt for any missteps. It also showed up on two different screens I ran this weekend for another story -- one looking for ten years of sustainable dividend increases, and the other for healthy growth across a spectrum of five-year cash flow growth metrics.
It's a titillating blend of long-term growth, focused management, and market-leading efficiency. My curiosity has been thoroughly awakened, and I'm going to take a closer look at this company.
Send in the clowns
So ends a rather optimistic roundup of the market's supposed bottom-feeders. 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 week, and we'll take a look at another batch of mishaps and disappointments. It'll be fun and educational.
Further Foolish Reading:
- Shining a Light on Solar Power
- I Love Solar Power
- Subprime Subpar for CompuCredit?
- The Market's Big Movers
- 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. Try a 30-day trial subscription to see whether bargain-hunting is right for you. CompuCredit is a Motley Fool Stock Advisor pick.
Fool contributor Anders Bylund is still a reluctant NovaStar shareholder but holds no other position in the companies discussed this week. (Huge, unsupported dividends can be addictive, you know.) You can see Anders' current holdings for yourself, or take a peek at The Fool's disclosure policy.
