With a name like ChoicePoint (NYSE:CPS), you might expect a stock to, well, point in some particular direction. But that's precisely what this data collating company isn't doing.
After the company reported weaker-than-expected results Thursday morning, ChoicePoint stock took an immediate and precipitous dive, down 15% in just a few short hours. After the blessing of a JPMorgan Chase (NYSE:JPM) analyst on Friday, the previous day's losses were pared a bit. Even so, ChoicePoint stands today a full 8% lower than it did before its earnings release.
And that, Fools, may spell opportunity. Let's turn to the numbers to see why.
First, the reasons for ChoicePoint's Thursday dive: The company missed consensus revenue targets by a wide margin, reporting just $240.8 million when Wall Street had been expecting $266.6 million. On profits, the picture was less clear. Analysts predicted $0.45 per share -- but whether those were net profits or some pro forma variant is unclear. Either way, though, ChoicePoint missed the target, reporting $0.40 per share under generally accepted accounting principles, $0.39 per share for continuing operations, or $0.44 per share under its own pro forma calculation -- short of consensus targets any way you slice it.
"Past performance is no guarantee of future results."
But here's the thing. What ChoicePoint did last quarter has little relevance to what this company will do in the future, because the ChoicePoint of tomorrow will be a much different animal than it was a few months ago. As described in our Foolish Forecast last week, ChoicePoint is in the process of realigning its business significantly, selling off roughly 15% of its less profitable business units, and using the proceeds to bulk up the remainder -- businesses that appear to be, on average, both faster-growing and twice as profitable as the units it is divesting.
In the outlook section of the firm's earnings report, ChoicePoint promised investors full-year organic sales growth of 5% to 7%, and operating margins of 23% to 24%. Although the former is less than impressive, and the latter suggests a continuing downtrend in operating margins, I have to say that these numbers could have looked a lot worse.
Remember that options are being expensed this year, the firm continues to make payments related to its role in the ongoing ID theft scandal, and it's in the midst of a major corporate restructuring -- all things that hurt operating margins. Yet despite all these negative factors, operating profitability should only drop by two or three percentage points. That suggests to me that ChoicePoint is a much stronger business than Wall Street believes. And although I don't feel comfortable working a valuation on this firm until its restructuring begins to settle down, you can be sure I'll make a point of doing so as soon as it's possible.
What role does ChoicePoint play in the ID theft scandal that's touched companies from Ameritrade to DSW to Wachovia? Read on and find out:
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Fool contributor Rich Smith does not own shares of any company named above. JPMorgan Chase is a Motley Fool Income Investor pick. The Fool has a disclosure policy.
