A. Schulman (NASDAQ:SHLM) is coming off back to back negative earnings surprises and the most recent one carried a big top line disappointment. It is a Zacks Rank No. 5 (Strong Sell). It is the Bear of the Day.
Picking the bear of the day is a difficult thing as it doesn't mean that SHLM is a bad company or even a bad stock. It just means the stock has hit a rough patch with estimates moving lower. The rubber hit the road for SHLM, a public company since 1972 with 34 manufacturing facilities and 3,300 associates following the most recent earnings report.
A.Schulman supplies plastic compounds and resins for packaging, automotive, consumer products, and industrial applications. The company was founded in 1928 and is headquartered in Akron, Ohio.
The last two quarters have not been that strong. The February 2013 quarter saw earnings of $0.27, which were $0.13 less than the Zacks Consensus Estimate of $0.40. That translated into a negative earnings surprise of 32%. The May 2013 quarter was another miss of $0.13, but since expectations for this quarter were higher, the miss was only 20%. Still back to back misses like this are not what investors want to see.
Driving the Miss
The real problem with the most recent miss was the softness on top. By that, I mean that the company came in well below the Zacks consensus Revenue estimate. A 5.6% short fall on top makes it exceedingly hard for this company to outperform on the bottom line.
Earnings Estimates Tick Lower
Of late, earnings estimates have declined. The Zacks Consensus Estimate for 2013 has slipped from $2.18 in March to $1.72 August. That sort of decline is something makes a lot of people take notice is and is the major reason this stock has a low Zack Rank. The same could be said of the 2014 Zacks Consensus Estimate as it fell from $2.55 in March to the present level of $2.05. Earnings estimate revisions are the largest component of the Zacks Rank that can influence a change in rank.
The valuation picture for SHLM is in line with the industry average right now, but that could change over time. A 15.5x forward P/E is slightly above the 14.9x industry average, so a tiny premium there. The 1.5x price to book multiple is less than half the 3.3x industry average and a price to sales multiple of 0.4x is almost a third of the 1.1x industry average. Almost a value stock, but the revenue growth for this year is negative and next year is only supposed to be in line with the industry average. Factor in a 1.9% net margin vs. a 7.7% net margin for the industry average and investors may want to wait until the bottom-line improves.
The price and consensus chart shows a disturbing trend in earnings estimates. The stock has moved up through the changes in earnings estimates, which start the year with some growth but have given that all back down the road. As a big Buckeye fan, I can say they are headquartered in the right spot, but SHLM needs to improve margins and grow revenue to get back on the right track.
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