Any time negative news- or negative earnings for that matter- is announced, the stock in focus generally takes a tumble. In this article I wanted to focus on two companies which have fallen by as much 5% during Tuesday's regular trading session. Both of these companies announced earnings and revenues that were well below analysts' expectations for the quarter.
AK Steel Holdings (AKS) - The company announced quarterly results on Tuesday, October 23rd and the results missed estimates by a fairly wide margin. The company reported ($0.25) earnings per share for the previous quarter, beating the Thomson Reuters consensus estimate of ($0.37) EPS by $0.12. The company's quarterly revenue was down 6.9% on a year-over-year basis.
Why should investors short AKS over the next few sessions? First and foremost, as a result of today's earnings, expectations for the company's performance in the upcoming quarter are lower (-$0.09/share) than they were ninety days ago ($0.00). Secondly, the company reported revenue that fell 6.9% on a year-over-year and missed expectations by 7.70% ($1.55 billion vs. $1.46 billion). Lastly, the state of the global economy doesn't look to be getting any better and as management noted,
Challenging domestic and global economic conditions continue to weigh on shipping volumes and prices and while we expect to enjoy lower raw material costs in the future, we are still working through some higher cost raw material inventories.
CIT Group (CIT) - The company announced quarterly results on Tuesday, October 23rd and the results missed estimates by a fairly wide margin. The company reported ($1.52) earnings per share for the previous quarter, missing the Thomson Reuters consensus estimate of ($1.20) EPS by $0.32. The primary catalyst behind CIT's poor quarter was the fact the company restructured much of its high-cost debt. The latest results included $471 million in debt-refinancing charges related to the prepayment of $4.6 billion of high-cost debt, while the year-ago quarter included $169 million in debt-refinancing charges. The good news is the fact CIT was able to pay off that debt, the bad news is the aggressive manner by which it paid the debt off resulting in a virtual $471 million dollar pre-payment penalty.
According to the Associated Press, John Thain, chairman and CEO of the New York-based company, said "CIT Group eliminated the last of its $31 billion of restructuring-related debt during the latest quarter. The company also achieved several strategic milestones this quarter that will lower our funding costs and better position CIT for future profitability". If, in fact the eradication of the company's debt ends up being a good thing, then CIT is a great long-term play at current levels. On the other hand, I still think CIT is a bit overvalued and that shares would need to drop at least another 10% - 12% before establishing a long position.
Potential investors looking to establish a position in either AKS or CIT should do so from a short perspective. Why? On one hand, AKS is facing what could be a very long and drawn uncertainty in terms of both the U.S. and global economic conditions and if CIT continues to struggle in the wake of paying off its high-cost, the above mentioned strategy was a complete failure.