A few weeks ago, I took a look at three companies that had reported stellar earnings that Wall Street seemed to ignore. A mixture of investor apathy and little analyst coverage helped keep these no-names flying under the radar. But it's stocks like these that can invigorate an aching portfolio and provide unexpectedly good returns in an otherwise topsy-turvy market.
Today I want to take a look at not just some of the earnings beats last week, but also some of the earnings shortfalls. It's amazing what an earnings report can tell you about a stock and its sector... if you just listen.
Analog Devices (NYS: ADI)
Analog Devices last week confirmed what we've known for months: the semiconductor sector is in a cyclical downturn. NXP Semicondcutors (NAS: NXPI) , a company at the forefront of the near-field communications movement, missed expectations one month ago, and even industry giant Texas Instruments (NYS: TXN) has seen its fourth-quarter estimates drop by nearly 20% from just three months ago.
Analog Devices missed the consensus on both profits and revenue, its second straight quarter of doing so. Its communications division, which accounts for 19% of its revenue, saw a 9.2% sequential decline and a more worrisome 14.1% year-over-year drop. Gross margin also fell by nearly 3 percentage points. Analog alluded to the more cautious spending habits of its customers as the primary reason its results fell short of its prior bullish forecast. No matter how you look at it, investors need to tread very lightly around semiconductor companies, period!
Canadian Solar (NAS: CSIQ)
OK, you probably didn't need me to tell you that the solar sector is financially challenged, but sometimes a report is such a doozy to the downside that it reminds you things could always get worse. Such is the case with Canadian Solar.
The Canadian-based solar cell and solar module product producer threw a beach ball at the side of a barn last week and missed by a mile. Revenue topped analyst estimates slightly, but its quarterly loss of $1.02 was double what Wall Street had expected. Canadian Solar has been able to grow revenue very quickly over the past year, but costs have risen even faster. Factor in that gross margin fell almost 15 percentage points to just 2.4% and you have a recipe for disaster. Analysts now expect Canadian Solar to lose money both this year and next. Keep in mind that Canadian Solar isn't the only offender -- JA Solar (NAS: JASO) , a personal favorite of mine, also would have been better staying in bed rather than reporting earnings last week. I think it'd be wise to avoid solar stocks altogether until the sector's outlook becomes clearer.
Deere (NYS: DE)
Seriously, did Wall Street get a look at this report? It's phenomenal! High corn and soybean prices are leading U.S. farmers to spend, spend, spend as U.S. farm income is expected to come in at a record $103.6 billion this year, according to the U.S. Department of Agriculture. This is all excellent news for farm equipment producers Deere and Caterpillar (NYS: CAT) .
For the fourth quarter, Deere's results crushed the 15-analyst average estimate of $1.44 in per-share profit. Deere actually produced $1.62 in earnings per share on a 20% jump in sales to $8.6 billion. Even with raw material costs expected to be $150 million higher in 2012 than they were this year, Deere seems like an exceptionally undervalued company. Until proven otherwise, agricultural stocks remain a hotbed for optimists.
Listen and look for trends. If you notice a series of companies in one sector missing earnings, then it's probably a good sign that it's a sectorwide trend. Let those warnings be your guide and don't ignore them if you see them!
What's your take on these three companies? Would you go against the grain or are you in accord with my analysis? Feel free to share your thoughts in the comments section below. Also, I invite you to obtain your free copy of our latest report, "The Motley Fool's Top Stock For 2012," which details a hand-picked winner from our analysts.
At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He definitely thinks Deere's tractors are sexy... but in a platonic investment-styled way. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Texas Instruments. Motley Fool newsletter services have recommended buying shares of NXP Semiconductors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's plowing its way to success.
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