Reviewing This Week's Earnings Of Interest To Value Investors

Includes: AEO, BIG, GES, MDT, SIGM
by: Vince Martin

Earlier this week I previewed earnings for 5 companies of interest to value investors. A review on how they fared:

Medtronic (NYSE:MDT): Medtronic reported strong fiscal first quarter earnings on Tuesday morning; investors responded by driving the stock up 6%, with another 3.3% jump on Wednesday. The firm met analyst expectations, with revenues up slightly (2% in constant currency) and earnings down about 1% (though up slightly on a per-share basis, due to the company's aggressive share repurchase program).

The company reiterated fiscal-year (ending April 2012) guidance for $3.43-$3.50 per share, giving the company a P/E right around 10 based on Wednesday's close of $34.21. In its conference call, the company also guided free cash flow of about $4 billion, or 11% of market capitalization, while promising to return 40-50% of its cash flow to shareholders through dividends and share repurchases. The company's current dividend yield sits at 2.84%. You can read my detailed article on Medtronic's conference call and new CEO here.

American Eagle Outfitters (NYSE:AEO): AEO was clipped after reporting disappointing fiscal second quarter earnings on Wednesday morning. Total revenue was up 4% year-over-year, but same-store sales were flat and rising commodity costs and rents drove margins down. The company earned 10 cents per share, compared to 13 cents the year before. Investors were not pleased; the stock dropped over 12% on Wednesday and Thursday combined, falling to $10.17, a level not reached since the spring of 2009.

AEO also announced guidance of 85 cents to 95 cents per share for fiscal year 2012 (ending in February). At the midpoint, this gives the company a forward P/E just over 11. However, of more concern to value investors, the company has burned $150 million in free cash in the past two quarters.

Despite the earnings struggles, AEO might be worth a closer look. The negative free cash flow figure was due in large part to a marked rise in inventory (which rose $170 million over the last two quarters). The inventory rise was related to the company's decision to expand its product lines to accessories, and carry more styles of denim. (Said vice chairman Roger Markfield on the company's conference call: "I'm pretty damn comfortable with where we are in terms of inventory.") An additional reason for the higher inventory (and lower margins): cotton prices, which spiked earlier this year, then receded over 50%, though they have now again reached a one-month high.

AEO sports a sterling balance sheet, with $2.64/share in net cash (over one-quarter of market capitalization) and no debt. Its dividend yield is now 4.33%; given the company's cash balance, the payout ratio of 48% (based on the midpoint of 2012 guidance) is high but not unacceptable. Investors looking for a bottom may hope that the company's merchandising strategies, combined with a continued fall in cotton prices, will lead to better margins and growth in the stock price.

Guess? Inc. (NYSE:GES): Fellow retailer Guess? fell nearly 7% on Thursday after reporting strong second quarter earnings, due to the company reducing third-quarter and full-year earnings guidance. The company now expects to earn between $3.25 and $3.35 per share for fiscal year 2012 (ending in February), down from previous guidance of $3.30 to $3.50 per share.

International sales were a bright spot for the company, who saw growth in Europe and Asia. The company is trading near a 52-week low at $31.04, and has bounced off support around $30 in the last few weeks. At an enterprise value-earnings ratio right at 8 based on the midpoint of the company's guidance, Guess? might still be worth consideration.

Sigma Designs (NASDAQ:SIGM): SIGM stock dropped 8% on Thursday following the release of fiscal second quarter earnings after the close on Wednesday, and, frankly, I'm surprised it didn't drop further. The company swung to a 69-cent loss on a GAAP basis (44 cents on a non-GAAP basis), missing analyst estimates of a 2-cent loss. Revenues fell 23% from the prior quarter and 36% from the year-ago quarter.

Despite the over $5/share in cash on the books (and a book value of $12.61), value investors should be wary of SIGM at this point. CEO Thinh Tran blamed the earnings miss on the uneven transition between older and newer models of the company's set-top boxes for home entertainment. Analysts now project a loss into fiscal year 2013, adding a new level of uncertainty to the stock.

Big Lots (NYSE:BIG): Big Lots reported solid second quarter earnings, raising earnings per share over a year ago. Net earnings were down slightly, but EPS figures gained due to the company's aggressive share repurchase program. (The company has repurchased 13% of outstanding shares so far this year.)

The company narrowed its guidance range for fiscal year 2012 (ending February) to $2.80-$2.90 a share, up from a previous range of $2.75-$2.90. It guided a rather weak free cash flow number of $145 million, about 6% of market capitalization, though this includes expected losses from the company's recent acquisition of Canada's Liquidation World.

Investors yawned at the earnings, as the stock fell half a percent on a down day Thursday. It seems an appropriate reaction; same-store sales were down 1.5% year-over-year, and margins were down slightly. At Thursday's close, BIG trades with a forward P/E of 11.2, which seems reasonable given the company's slow sales growth and margin pressures from consumer weakness and higher input costs. The repo program should provide some cushion to the stock, and short-term technicals look promising (the company just crossed its 20-day moving average, and has the 50-day in its sights). But BIG doesn't seem to provide the margin of safety value investors look for.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.