Earnings Review For Value Investors

by: Vince Martin

Earnings season is in full swing, and after previewing some key reports of interest to value investors, I'll follow up by reviewing notable earnings releases from the past week:

Advanced Energy Industries (NASDAQ:AEIS): Analysts were skeptical of the company's third quarter guidance of 20-30 cents in non-GAAP earnings on $130-$145 million in revenue, and the analysts were proven correct on Tuesday evening. Sales of $128.5 million were below guidance, with non-GAAP earnings of 21 cents coming at the low end of the company's projected range. The stock actually rose three cents in Wednesday's trading, as an 8.5% fall during Monday's broad market drop may have priced in lower expectations for the quarter-end results.

Despite the struggles in the solar industry as a whole, it was the company's solar inverter division that showed strength, with sales up 40% sequentially and 38% year-over-year. The legacy Thin Films division, still the company's main revenue driver, was hit hard, with sales down 21% from the prior quarter and 26% from the year-prior period. The company blamed the slowdown on "panel overcapacity and pricing pressure" in the renewables segment, and a "pause in investment" in flat panel displays.

The question for investors going forward is whether AEI's struggles are temporary, and just how soon the thin films market will return to stability. Given the company's growth in solar inverters, and the $2.80 per share in net cash, AEI could be a bargain if the company can return to its profitability of 2010 and the first half of this year. It wouldn't take much; the company's recent announced restructuring, which is targeted to save roughly 40-50 cents per share annually, and the growth in solar should mean that the thin film chip market only needs to stabilize to put AEIS back on the right track. Given that the company's guidance was for another substantial sequential decline in total revenue, and breakeven non-GAAP profits for the fourth quarter, it appears that investors will be waiting until at least 2012 for the company -- and likely the stock -- to turn around.

Almost Family (NASDAQ:AFAM): The home health care provider reported third quarter earnings of 52 cents per share on $86.2 million in revenue. Investors were clearly disappointed, as the stock tumbled nearly 20% on the week, closing Friday at $15.88.

Earnings were likely not the only catalyst; on Monday, the Center for Medicare and Medicaid Services finalized a 2.31% cut in reimbursement for home health agencies for calendar year 2012, below the earlier proposed cut of 3.35% but still the sixth consecutive annual decline in repayment rates for providers.

As attractive as AFAM looks right now -- its P/E is just 7, and trailing twelve-month cash flow is nearly 20% of enterprise value -- the week's movements show the danger of AFAM stock, and the Medicare-reliant health care industry at large. As I argued last month, government-reliant industries are facing a perfect political storm, with Democratic populism buffeting them from the left, and the traditional Republican focus on pro-business policies now exchanged for deficit hawkishness. According to the company's earnings report, the 2011 CME cut reduced pre-tax profit by $11.5 million for the first nine months, representing an earnings loss of over $1 per share. With another cut coming in 2012, earnings should take another hit, and it seems unlikely that the company's sterling fundamentals will hold up. Yes, the stock is off more than 50% from May highs; but investors arguing that continued government strangulation of the industry is somehow "priced in" at current levels should realize that AFAM stock -- and those of competitors such as Amedisys (NASDAQ:AMED) and LHC Group (NASDAQ:LHCG) -- may still have much further to fall.

Convergys (NYSE:CVG): Convergys delivered a blowout third quarter, beating estimates and raising full-year earnings and revenue guidance. The stock responded in kind, jumping 16% over the next two days before closing the week at $11.86.

Despite the strong week -- which capped a five-week run up about 40 percent -- CVG still looks undervalued. The gain from the sale of its Cellular Partnerships unit netted the company $265 million after taxes, giving the company nearly $3/share in net cash after the third quarter. Earnings guidance of $1.28 for 2011 gives the company an enterprise value-to-earnings ratio of 7, with free cash flow easily accounting for more than 10% of enterprise value (as it has for the past four years). The company initiated a $200 million stock buyback during the third quarter, representing 14% of the current shares outstanding, which will hopefully provide further fuel for the stock to return to the $14-$15 level at which it traded earlier this year.

Earnings have been decreasing at Convergys over the past few years, and investors may want to wait before deciding that 2011 is a genuine inflection point or just an outlier. But the still-low valuation should give CVG shareholders some solid downside protection.

Cooper Tire & Rubber (NYSE:CTB): Earnings were a mixed bag for Cooper Tire & Rubber, as the company's profit of 27 cents missed consensus estimates of 29 cents, yet revenues of $1.05 billion beat the Street. The stock dropped 7% on Monday after reporting, yet gained nearly all of the losses back by Friday, closing at $14.27, down less than half a percent for the week.

The market reaction seems appropriate, as investors learned little from the report. The story for Cooper Tire remains the same: the company is holding up well on the top-line amidst economic worries; yet higher input costs continue to eat away at margins and profits. Indeed, year-to-date, sales are up 18% year-over-year, while earnings have dropped over 40 percent.

CTB still offers a nearly 3% dividend yield and a 90-year history of navigating crises, while trading at less than 11 times trailing earnings. Long-term investors with the patience to wait out the uncertainty of the next few quarters may be rewarded, and have the opportunity to generate income in the meantime.

Entropic Communications (NASDAQ:ENTR): The provider of chips for home entertainment networking devices matched analyst estimates with third quarter earnings, but a weak fourth quarter forecast for earnings of just 10 cents a share led to a 6% drop. The stock closed Friday at $5.56, off 8% for the week.

As I wrote, the long-term story for ENTR still holds; trailing enterprise value-to-earnings is just 5.2, and trailing cash flow over 10% of enterprise value. The company's over $2 per share in net cash and growth prospects should comfort long-term investors.

The question is the stock's short-term trajectory. A nice October rebound looks likely to be slowed by Thursday's earnings, and the high-beta stock (2.6, according to finviz.com) could nosedive again should the broad market struggle, perhaps down to its September lows around $4/share. Long-term investors might consider cash-secured puts (such as the February 5, bid at 60 cents) as a hedged way to play the stock. These options allow investors downside protection against a volatile stock and to control the potential entry point should the stock drift down from current levels.

Insperity (NYSE:NSP): Insperity beat estimates on the bottom line for a sixth consecutive quarter, with adjusted earnings of 37 cents per share beating Wall Street consensus of 26 cents. The company did miss slightly on the top line.

The market mostly yawned; after falling 3.5% in Monday's down market day, the stock drifted lower over the week, closing Friday at $25.43, down nearly 5% for the week.

Still, NSP investors should be comforted by the report. Revenue was up 14% year-over-year, with 15% growth in the first 9 months of 2011 versus 2010. Two figures of note were buried in the earnings release: gross profit per employee rose 10.5% year-over-year on a nine-month basis, while operating expenses rose 14.4%. Yet the rise in expenses was largely due to costs from re-branding (the company changed its name from Administaff earlier this year) and acquisitions, neither of which should repeat going forward. These numbers bode well for margin expansion at NSP, which along with its significant cash balance may justify its current P/E right around 20.

MarineMax (NYSE:HZO): Disappointing fiscal fourth-quarter earnings capped off a difficult week for MarineMax, as the stock fell by over 25% after missing analyst estimates and reporting a 49-cent per share loss for the 2011 fiscal year.

At Friday's close of $6.15, HZO remains an interesting speculative play for value investors, however. As I noted two weeks ago, the upper class has withstood the recent economic troubles with little difficulty, and the coming wave of retiring baby boomers may provide a boost to the struggling boating industry. As the country's largest boat detailer, MarineMax could benefit.

And while negative earnings are an obvious red flag, same-store sales are increasing, and CEO William McGill said in the company's earnings report that he feels the "industry has bottomed." In the meantime, HZO trades well under its tangible book value of $8.67, and in fact its $143 million market cap is just two-thirds of the company's current inventory. The company will need to execute its turnaround, but there could be some value in the stock at current levels for investors with patience and some tolerance for risk.

NutriSystem (NASDAQ:NTRI): NutriSystem's third quarter earnings disappointed, as the company missed estimates and lowered full-year earnings guidance, from a range of 65 to 70 cents down to a range of 45 to 50 cents.

Weak consumer confidence continued to weigh on the company's top line, as revenue disappointed. Still, the company's cash flow remains outstanding: $48 million through the first three quarters, some 17% of the company's enterprise value. CEO Joseph Redling spoke optimistically about 2012 on the company's conference call, noting the company's new products, new recipes, and new spokesmen that NutriSystem hopes will drive new sales.

The third quarter shows that NTRI is no longer a pure value stock, but more of a turnaround play. But the company's 6.17% dividend yield -- more than doubled by cash flow in each of the last five years, including 2011 -- and strong balance sheet should give investors patience. At Friday's close of $11.34, NTRI still looks like a buy, if perhaps a bit more speculative than it seemed earlier in the year.

True Religion Apparel (NASDAQ:TRLG): True Religion did it again, capping off a banner calendar year by gapping up after earnings for the fourth consecutive quarter. This time, the company's 51 cents in adjusted earnings and $108 million in revenue narrowly beat consensus expectations, and the stock rose 8% in trading on Wednesday, overcoming a 5% drop into earnings on Monday and Tuesday. The stock hit an all-time high on Wednesday of $37.76 before pulling back, closing the week at $35.54.

TRLG's spectacular run has mirrored the company's success. Sales were up 17% year-over-year, as declines in the Wholesale segment were more than overcome by the company's success in self-branded retail outlets. The stock does trade for nearly 20 times trailing earnings; yet the solid, consistent growth, the strong balance sheet (over $6 per share in net cash), and the company's new international presence all augur for continued strength in the stock price. It may seem risky to put money behind a company that sells $200 jeans in the middle of an economic downturn; yet the company's execution should give investors confidence.

United Online (NASDAQ:UNTD): The provider of Internet services through the NetZero and Juno brands, and the owner of Internet florists FTD and Interflora reported seemingly solid third quarter earnings. The company narrowly missed estimates on revenue yet delivered 23 cents in net adjusted earnings, ahead of Wall Street's projection of 18 cents.

The market seemed disappointed, however, as the stock fell over 7% on the week to close Friday at $5.66. At those levels, the company now offers a 7% dividend yield. The company's trailing P/E is below 10, and free cash flow for the quarter was over $16 million, easily covering the $9.3 million paid in dividends. The company also announced an agreement with Clearwire to market 4G mobile wireless under the NetZero, perhaps extending the life of its legacy Internet access brand. The success of this agreement is integral to the company's ability to return to revenue growth; the Internet segment fell 25% year-over-year, compared to just 4% growth in the Floral segment.

UNTD still looks like a solid value pick. The floral business, which drives two-thirds of revenue, has held up well despite economic difficulties. The legacy Internet business, while declining, still provides profits which the company is intent on returning to shareholders. And the company's 7% dividend yield should comfort investors waiting on the market to respond to the company's excellent cash flow.

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