Why Entropic's Shares Fell Into Disorder

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 Entropic Communications (NAS: ENTR) got hammered this morning, falling nearly 15% before settling into a 12% loss as of this writing. The source of the drop appears to be mediocre forward guidance, as the company bested both top- and bottom-line expectations for the current quarter.

So what: Entropic CFO David Lyle offered fourth-quarter guidance in the company's earnings call of $89 million to $92 million in revenue, with adjusted EPS coming in at about $0.08. Analysts had expected an average of $92.8 million in revenue and $0.09 in EPS, so Entropic's own estimates are a bit disappointing. The fourth-quarter projections represent very modest growth over the third quarter's results of $89.8 million in revenue, but a decline in EPS from the current $0.09 result.

Now what: These flat projections don't offer much promise for shareholders that have watched Entropic's P/E shoot up from 2011 to the present day as earnings and free cash flow have begun to decline. A potential gross margin decline in 2013 is also cause for concern, as Entropic's revenue has seemingly stalled out this year, and a changing product mix may depress aggregate growth over the coming year. At a P/E near 40, Entropic doesn't have a lot of room for error, and this guidance looks like an error the market isn't willing to deal with in the short term.

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The article Why Entropic's Shares Fell Into Disorder originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. 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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