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, a low-power specialist is underpowered, there's a cut in the cable, and, well, I don't know the way to San Jose.
Subsupra? Between the beyond?
Let's start off with low-powered semiconductor designer Transmeta
The shortfall against estimates can be explained by $4.3 million, or $0.02 per share, in restructuring charges as the company said goodbye to 39% of its total staff last month. The cuts aren't finished yet, either; in the next two quarters, another 25 to 33 people will lose their jobs, leaving Transmeta with between one-half and one-third as many employees as it had at the start of 2007.
Management pointed a finger or two, blaming the company's underperformance on road-map decisions at Sony
The company isn't giving up entirely, and CEO Les Crudele pledged to focus his assets on developing new technologies as well as selling existing patent licenses to new customers. The long-term goal is to "build a company that is financially stable with a steady and consistent revenue stream, sustainable profitability, and positive cash flow."
That's all very good and noble, and the R&D budget did just about triple over last year -- but it's also very ambitious, to say the least. Transmeta was a pioneer in low-power semiconductor solutions a few years ago, but it's safe to say that the market has pretty much caught up to whatever competitive advantage the company once had. I'm not holding my breath while waiting for Transmeta to stop bleeding red ink, folks.
Hold the line
I'm moving on to our next miscreant, namely broadband communications provider Charter Communications
The press release put a $54 million interest and tax payments load front and center, though that doesn't explain all of this miss. In early February, a mid-quarter update kept pushing the idea of positive "adjusted EBITDA" numbers, but skipped over the negative GAAP earnings outlook entirely. Just remember that Earnings Before Inconvenient Things Don't Apply, and you'll be fine -- especially when even the EBITDA had to be massaged to remove even more uncomfortable facts. It's not the sort of corporate governance and candid insights into operations that I look to include in my own portfolio.
Charter is playing catch-up with larger cable operators like Comcast
The balance sheet looks precarious, too. $60 million of cash on hand matches up rather poorly with $19 billion in long-term debt, and just the $478 million of interest payments on that massive debt goes a long way toward explaining the weak financial performance. The company keeps selling off assets to service its debts, and shareholder equity is sinking deeper into deficits every year. Can you say " value destroyer"?
What's that smell?
The last item on my list today is chemical detection expert RAE Systems
Wall Street forecast a $0.01 profit per share, and management provided revenue guidance of $17 million to $21 million. Sales topped that estimate at $21.1 million -- a 15% annual increase -- but earnings came in at a $0.02 loss per share.
Most of those strong sales happened in Europe and Asia, though management promised to pay more attention to the North American market, specifically the energy production, environmental safety, and first-responder sectors. Perhaps the company is anticipating truly exciting sales there, which would explain the 62% year-over-year inventory buildup, far ahead of sales growth. Got any particular plans, guys?
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:
- What's an Expense Ratio?
- The Television Giants Are Rumbling
- New and Improved. Oh, Really?
- Take cheap when you can get it.
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. Microsoft is already an Inside Value recommendation.
Fool contributor Anders Bylund holds no position in the companies discussed this week, but his first CD player was a Sony Walkman. Time flies, doesn't it? You can see Anders' current holdings for yourself, and Foolish disclosure is cooler than the other side of the pillow.
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