Why Emulex Shares Tanked

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Emulex (NYS: ELX) fell as much as 11% today after the networking-device maker cut its forecast for the coming quarter in its earnings report.

So what: Emulex actually bested adjusted EPS estimates of $0.22 by $0.04, but revenue growth was slow at just 5%. The company also took a $38.5 million charge related to a patent litigation settlement, giving it a GAAP net loss of $0.33 per share. For the next quarter, Q1 fiscal 2013, Emulex is guiding earnings per share of just $0.14 to $0.16 when analysts were expecting $0.21, and is also predicting a sequential decline in revenue to $118 million-$122 million. Other GAAP charges are expected to wipe out nearly all of the adjusted profit as well.

Now what: Cutting guidance is never a good sign, and neither are excessive non-cash charges for items like amortization of intangibles, stock-based compensation, royalties, and other expenses. Emulex may look cheap at a forward P/E of just 6.3, but I'd like to see consistent GAAP profits first. With six straight quarters of net losses in 2010-2011 and another one now, this company still has something to prove.

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The article Why Emulex Shares Tanked originally appeared on Fool.com.

Fool contributor Jeremy Bowman holds no positions in the companies above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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