Martin Plaehn's Cautious Outlook For Control4 Corporation Is Justified

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About: Control4 Corporation (CTRL)
by: Andre Waldron
Summary

Control4 missed on 4th quarter revenue estimates and its stock price declined based on the cautious outlook given by Martin Plaehn.

Martin Plaehn's cautious outlook was based on a weak macro environment. This can be seen in the weakened consumer sentiment and the recent NY Fed January Survey of Consumer expectations.

Further evidence of a weak and uncertain macro environment can be seen in the expected GDP decline and the potential for rates to be raised twice in 2019.

Control4 Corporation (CTRL) had 4th quarter EPS totals beat Wall Street estimates by posting quarterly earnings of $0.44 EPS. This topped Zacks' consensus prediction of $0.43 per share and outpaced last year’s estimate of $0.40 per share. While Control4 Corporation’s streak pales in comparison to the amazing streaks of NBA stars James Harden and Russell Westbrook, 4 straight quarters of outpacing EPS estimates is not a bad accomplishment.

However, investors were not pleased with the company’s miss on 4th quarter revenue. The company reported record fourth-quarter revenue totals of $72.487 million. While this was a increase of nearly 6.5% year over year, it fell short of Wall Street expectations. In particular, the revenue total missed the Zacks consumer estimate by 0.78%.

Control4 Corporation is a leading source of personalized control and automation services. It is keen on its efforts to gain footing in the IoT space through its mission of giving individuals control of any and all devices in their homes. The firm is an industry leader in terms of interoperability. Just recently, Control 4 was named the top whole-home automation brand in CEPRO Brand analysis. This allowed Control4 Corporation to secure its place as the top brand in terms of whole house automation for a fourth consecutive year.

In spite of a record year in terms of revenue and net income, Control4’s share price fell dramatically when the company delivered a cautious outlook for 2019. Control4 CEO Martin Plaehn based the company’s conservative estimates on the increased economic uncertainty that has surfaced through the consumer product sector. In his view, the market performance and sentiment of Q4 2018 was a stark contrast compared to recent quarters.

The first quarter is usually Control4's weakest quarter seasonally. Yet, the firm’s outlook for Q1 2019 is weaker than prior years.

Economic Headwinds

Let’s briefly take a deeper dive to examine Martin Plaehn’s point of view. The following graph has the 4Q 2018 market performance totals by market sector. Particular attention should be paid to the performances of the information technology and consumer discretionary sectors in the 4th quarter.

From a macro view, Martin Plaehn’s assertion of caution in the near term appears to be correct. The U.S consumer confidence index had a 6.4 point decline in January while University of Michigan’s consumer sentiment dropped 7.1 points in January to 91.2.

According to the NY Fed’s January Survey of Consumer expectations, America’s households have become increasingly pessimistic about the economic outlook in the U.S. Respondents had increased pessimism regarding job security and expectations of income growth. Most notably, consumer expectations of spending growth decreased significantly as opposed to December 2018.

In addition to the noted increase in structural unemployment, it has been forecasted that U.S. GDP growth is expected to decline to a total of 2.3% in 2019. It is highly likely that investors will be spooked even further if the Fed does indeed raise the federal funds rate two more times to its target rate of 3.0%.

Martin Plaehn is not alone in his assertion that Control4 would be affected by the uncertain macro environment. Needham gave Control4 a downgrade from Buy to Hold based on similar concerns.

Plaehn does believe that the company will put up a good fight in its effort to overcome its obstacles. The extra revenue that Control4 expects to get from its acquisition of NEEO should greatly aid in this effort.

Conclusion

However, the economic headwinds are clearly evident. In terms of momentum, Zacks has given Control4 a big F. This is indicative of their vulnerability.

Martin Plaehn’s assertion is correct. I would avoid Control4 in the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.