Earnings season started to pick up steam this week, and a number of potentially undervalued companies reported quarterly results. Below, a few key reports that should be of interest to value investors:
Majesco Entertainment (COOL): The small-cap video game maker saw its stock drop some 27 percent on Wednesday, as fourth quarter earnings disappointed and guidance for FY12 was below expectations. The company lost ten cents per share in the quarter, due in large part to a $2.7 million writedown of capitalized development costs for games that the company now feels will be unprofitable.
More disappointing was the company's guidance for 2012 (fiscal year ends in October), which called for non-GAAP earnings of 25-35 cents per share, on $125-$140 million in total revenue. That outlook represents, at best, a small level of growth over 2011 adjusted earnings of 28 cents per share on $125.3 million in revenue. Certainly, investors were seeking more from a stock that had nearly tripled in the twelve months preceding Tuesday evening's report.
Still, the stock's steep drop this week may have opened a buying opportunity for value investors. The company has 35 cents per share in cash, and trades just above 7 times forward adjusted earnings at the midpoint of FY12 guidance. Free cash flow for the year was $9 million, 13% of enterprise value, despite higher inventory and accounts payable (both of which should be converted to cash in the near future).
The stock has continued to fade since the earnings miss, closing Friday at $2.12. Given the stock's volatility -- it has a beta of 1.81, and a 52-week range of $1.04-$4.53 -- a further drop is not at all out of the question, particularly if the slow, steady rise in the broad market year-to-date stalls out. The company's Zumba Fitness 2 -- the sequel to the company's biggest hit -- is selling at a pace ahead of the original, according to the Q4 conference call. The game will soon offer downloadable extras and a Kinect version for the XBox 360 will be released in February. The company is also expanding into the online gaming world, with new releases set for Facebook to challenge the dominance of Zynga (ZNGA).
Video game sales struggled mightily in 2011, and Majesco's growth this year looks like a potential victim of that trend. Still, should the stock test the $2/share level, its balance sheet and cash generation may make COOL an interesting gamble. Another hit, acquisition rumors, or growth above the newly lowered expectations could drive the stock higher in 2012.
Interactive Brokers (IBKR): The discount broker and market maker reported full-year earnings of $1.40 per share on Thursday after the close. The stock rose 2% on Friday, closing at $15.58, and continuing a steady march up from October lows around $13 per share. The strong earnings report came despite a $29 million loss on investments in now-bankrupt MF Global, and the closure of a few accounts due to the subsequent market disruption, according to the Q4 conference call.
Trades and revenues in the market making segment continued to decline, but the brokerage business more than made up the difference, jumping 20% from 2010 on a full-year basis. The number of accounts rose 20% as well, an impressive figure given the retail investor's continuing reluctance to join the equity market.
At Friday's close, the stock is trading at a P/E just above 11 and at about 1.2x its book value. The recent run may have eliminated some of the margin of safety in the stock; a level closer to $14/share, where P/E would sit at 10, or even $13.33/share, where the company's dividend yield would break 3%, might be a bit more ideal. Still, IBKR is clearly increasing market share and showing top-line growth; investors bullish on the broad market could see some serious gains if the market shows enough long-term strength to ensure that the retail investor returns. Interactive Brokers' product and commission structure are both outstanding (I am a customer) and the reasonable valuation placed on the stock makes it worth a look, particularly at current levels. Any short-term dips could provide an even more compelling buying opportunity.
Southwest Airlines (LUV): The US' largest airline beat analyst estimates with fourth quarter adjusted earnings of nine cents per share, and 20 cents per share including special items. The company overcame higher fuel costs, which totaled a $1.7 billion increase year-over-year, according to CEO Gary Kelly on the Q4 conference call.
The company showed excellent top-line growth, as revenue rose nearly 30% year-over-year (with much of that growth created by the company's AirTran acquisition, which closed in May). But higher fuel costs and other expenses hurt the bottom line. For the year, the company earned 23 cents per share, and 43 cents per share on a non-GAAP basis, both figures down sharply from 2010. Free cash flow was approximately $400 million, over 5% of the company's market capitalization of $7.36 billion at Friday's close of $9.40.
While the earnings numbers are not outstanding, there is reason for optimism going forward. Between lowered hedging premiums, reduced interest expense, and increased synergies from the AirTran integration, the company expects to save nearly $250 million -- over 30 cents per share -- in 2012. Indeed, analysts are expecting sharply higher earnings in the next two years -- 81 cents and $1.09 in 2012 and 2013, respectively, according to Yahoo! Finance. In the meantime, one of the country's most admired brands offers an experienced management team, top-line growth potential and now 39 consecutive years of profitability. As oil again dips below $100, and airlines are able to make price increases hold, there may be room for LUV to take off.
Sanmina-SCI (SANM): The contract manufacturer reported fiscal first quarter earnings that disappointed analysts, and came in toward the low end of the company's guidance. The stock was down 8% in after-hours trading following Wednesday evening's release, but regained much of the loss on Thursday, and jumped nearly 8% on Friday, finishing the week up 4.6%.
It's hard to see why the market had such a delayed positive reaction to SANM's report. Revenues were down 10% year-over-year and nearly 12% sequentially. Margins compressed as well, leading to a year-over-year earnings drop of 70% on a GAAP basis (38% non-GAAP). The Thailand flooding hurt earnings, but clearly macroeconomic weakness was a larger cause of the $200 million drop in revenue from the prior year quarter, as all four of the company's customer segments saw sales decreases (pdf). The company did offer a bullish tone on the earnings conference call, claiming they felt the quarter was a bottom, with CEO Jure Sola claiming that he "expect(s) the second half to improve nicely." In addition, the company plans to buy back some $120 million in debt this year, which would provide a 14 cent per share boost to the bottom line annually.
Still, the December quarter seems hardly the catalyst for SANM to reach a five-month high, as it did at Friday's close of $10.91. The stock is up over 80% from October lows, despite relatively unimpressive results here and in the prior quarter. Yes, the stock trades at a small premium to book value (about 1.15x), and just 7.4x earnings on a non-GAAP basis. Using GAAP accounting, however, that ratio jumps to over 22, with short-term difficulties still ahead, even by the company's own admission. So many companies have called a bottom for their industry in conference calls; and a good number have been dead wrong. SANM's recent run seems to make taking the risk of further weakness unwise. The stock should likely stay on the watchlist until more positive information -- or a more attractive entry price -- emerges.