Value Bulldog's  Instablog

Thought I should follow up on my article from earlier this week on ECHO after their Q3 earnings. First, I should say that I was pleasantly surprised that management actually addressed the contingent liability issues in their call. This is certainly a step in the right direction in terms of tranparency. To their credit, the business did show some moderate operating margin leverage and positive operating cash flow for the first time.

However, the issus I raised are still valid. While non-cash contingent liability reversals were not 50% of operating income as in the first half of the year, they were still quite material at 28%. This time, the contingent liability reversal enabled ECHO to just barely make the EPs consensus number, rather than beating it by a penny. Of course, if you take out the division two more decimal places you get $0.1167 cents instead of $.12, so the contingent liability reversal was just barely enough for them to round up and make the number. EPS would have been $0.08 without the reversals.

Most importantly the company talked about slowing growth and continuing margin pressure. Wall St. estimates and price targets came down. Usually the kinds of accounting issues I identified are signs of a weakening business, and this appears to be the case with Echo. A lot depends on how much more margin leverage they can get but the stock still seems quite expensive to me at 32x my estimate of this year's earnings ex-reversals. Time will tell if they will rebound or if there will be more shoes to drop.


Disclosure: Short ECHO