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A. Schulman (NASDAQ:SHLM) reported earnings yesterday (Wednesday, July 2 - see conference call transcript). The company managed to squeak by the consensus EPS estimate of $0.41 by reporting pro-forma EPS of $0.42. This adjusted EPS excluded restructuring costs and asset impairments, but not the full tax impact of these items. If it had, adjusted EPS would have been lower by a few cents.

However, I was surprised to find that the company’s cash flow was healthy due to good working capital management. As the historically poor cash generation was a core part of my negative thesis (see "A. Schulman: Cashless Profits"), I can no longer recommend the stock as a short.

The other parts of my thesis – the poor quality of earnings, the weakening global economy and input price pressures from rising petroleum prices – still hold, but I’d rather not take the risk with the stock down 9% after reporting earnings.

Disclosure: Author has no position in SHLM

Source: A. Schulman: Improvement in Cash Generation