A Rough Earnings Season

by | Aug 2, 2012 | General

Even Apple was punished for only selling 26 million iPhones

The following question was raised by a client in a recent email. 

Two of our portfolio companies declined sharply after guidance and earnings announcements: FDS and CSTR.  Can’t remember when that has happened previously under Dock Street’s management. Would appreciate your comment on each and whether there will be any change in long term view.

First, these kinds of steep declines in price following an earnings call have happened before, but this June-July period was particularly difficult. It was also nice that the client only mentioned two stocks—there were several others that suffered the same fate this summer.

The common pattern that connects nearly all of them goes like this: Earnings are up, and so are sales, but the sales number failed to meet analysts’ expectations. Sometimes everything looks good for the current quarter, but guidance for the next quarter disappointed.

So the table below outlines what happened to Factset, a ten year holding at Dock Street and Coinstar, a very recent purchase. To summarize, both companies “missed” on sales (revenue)—Factset by $600,000 on $200 million in sales, and Coinstar by $14 million on more than $500 million in sales. But earnings per share were up for both companies and those earnings were better than expected. 

The lower part of the table shows the sales and earnings growth for both companies. Nothing wrong there.

Both stocks were marked down on the news, Coinstar by more than 25%. We’ll be doing nothing with Factset. We know it so well and have held it so long that these types of pull backs are a normal part of living with a stock. We are also now a customer of Factset Research products and we know how hard it would be to give it up.

But Coinstar is new to us and we have a decision to make. Doing nothing is not an option. If we can’t bring ourselves to buy more then we need to sell. Our inclination at this point is to buy.

Coinstar is in the DVD rental business with its automated kiosks under the Redbox brand. The company is seen as a DVD renter, but it sees itself as a robotic kiosk provider. They have other products they believe can be dispensed using their technology.

While viewed as stuck in an old fashioned business that has killed off Blockbuster and crippled Netflix, Coinstar’s execution of the DVD rental business produces exceptional economics. Coinstar prints money and, importantly, more each year.

So why all the nasty reactions to basically good results? It probably goes back to slow growth in the economy and investors looking for signs that companies are suffering from that weakness. The focus on sales figures, while ignoring profit growth is probably driven by macro worries, either 8% unemployment here or the recession in Europe.

While we pay attention to the economy we’ve learned that growing businesses can often prosper in a weak environment. In fact, that’s why we prefer growth companies—they don’t need a strong economy to do well. We will continue to do what we’ve always done, work to understand the businesses we own with the hope of holding them a long time and benefiting from growing earning power.

Best regards,

Daniel A. Ogden

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