Reviewing Last Week's Earnings Of Interest To Value Investors

 |  Includes: FRED, FSII, HLYS, MU
by: Vince Martin

Earnings season is nearing an end, but some interesting companies reported earnings last week. Below, a recap of earnings reports potentially of interest to value investors:

Fred's, Inc. (NASDAQ:FRED): The operator of discount stores in the Southeast reported fourth-quarter earnings on Wednesday. Those results topped analyst estimates on the bottom line; for the full year, earnings per share rose to $0.87 from $0.75 the year prior, a 16% increase. The company guided for similar growth in 2012, with full-year profits expected to come in between 96 cents and $1.04 per share.

The strong earnings report boosted the stock, which closed Friday at $14.56, up nearly 4% in a down week for the broad market. After a surprisingly weak February, the stock looks set to again challenge its 52-week high of $15.21, its highest level in some six years.

For long-term investors, however, the picture looks mixed. At the midpoint of 2012 guidance, the stock trades at 14.6 times forward earnings. Such a multiple seems high for a low-margin operator facing stiff competition from the likes of Target (NYSE:TGT) and, in particular, Wal-Mart (NYSE:WMT). Cash flow has been meager (although 2011 numbers have not yet been reported) and revenue growth limited as well.

The company does have a stock repurchase authorization for nearly 10% of outstanding shares, announced in conjunction with a dividend raise in February. While the company's steps to reward shareholders are promising, investors must wonder if the repurchased shares are being bought at the top of the market. The increased dividend (now 6 cents quarterly) still provides an annual yield of just 1.65%.

In short, Fred's bull run from $10 per share in October seems to have given it a valuation too rich for fundamental-based value investors. The stock may have some interest on a pullback, but at current levels it seems fairly valued -- at best.

FSI International (NASDAQ:FSII): The semiconductor equipment maker continued its strong run from 2011 lows, rising 15% in a week that included fiscal second-quarter earnings. FSII has now tripled after hitting a 52-week low of $1.70 in October, closing Friday at $5.20.

Not only did second-quarter earnings of 9 cents per share beat estimates, but third-quarter guidance for 17 to 23 cents per share crushed previous consensus. Analysts are now forecasting earnings of 41 cents for fiscal 2012 and 68 cents for 2013.

If they are right, FSII could still have some room left to run. Backing out the company's 59 cents in cash per share gives a forward P/E of 11.2, and an enterprise value just 6.8x expected 2013 profits. That remains a big "if" in the notoriously volatile semiconductor industry. But FSII, even with the recent strength, may still have room to run.

Heelys (NASDAQ:HLYS): The maker of wheeled shoes traded below its cash balance for months before starting a bull run in early February. The stock is now up 33% year-to-date, closing Friday at $2.46 after releasing fourth-quarter results on Tuesday.

The reason for the stock rise is unclear. 2011 results were underwhelming; the company lost 20 cents per share and burned $8 million in cash, though much of the cash burn was due to higher inventories and higher accounts payable. Sales did improve modestly over 2010, but hardly enough to justify the stock's recent strength.

The company offers $2.08 per share in net cash, and sports a tangible book value of $2.59 per share, above Friday's close. Still, the continued operating losses and cash burn make current levels untenable. A pullback toward net cash might make the company an interesting long-term turnaround play, with the cash balance providing downside cushion. But until there is more traction in sales, and better progress in the company's return to profitability, any premium to the stock's cash balance seems unwise.

Micron Technology (NASDAQ:MU): Micron reported fiscal second quarter earnings that came in below analyst expectations, with a loss of 23 cents per share versus consensus estimates of a 19-cent loss.

The stock fell 3.56% in Friday's trading following the Thursday afternoon release, closing at $8.40. The drop pushed the stock closer to the company's tangible book value of $8.18 per share; but Micron seems to have little else going for it right now. There are hopes for growth; the recent bankruptcy of Japanese competitor Elpida has raised hopes that Micron can raise prices for its NAND and DRAM memory chips. Pricing volatility in the industry has led Micron to six unprofitable years in the last decade, according to Bloomberg. Meanwhile, the company's focus on solid state drives (SSDs) created 15% sequential growth in the category, but president Mark Adams noted on the company's conference call that SSD growth will slow in the short term as customers work through inventory.

While the company does have hopes for a turnaround, the current fundamentals look bleak. The company has lost 47 cents per share over the last 12 months, and has a small amount of net debt. That debt may increase as the company is expected to purchase assets in the Elpida bankruptcy. Analysts remain bullish on the stock -- both R.W. Baird and Wells Fargo increased their price targets, to $12 and $10-$12, respectively, following the release -- but Micron remains a turnaround play. There appear to be some tailwinds in the industry, and a share price close to tangible book value can be tempting. But Micron has simply not performed consistently for years, as a company and as a stock, and the recent optimism seems a bit unfounded. Investors should look for a lower valuation, or confirmation of progress toward profitability, before jumping into MU.

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