A Validation of Weak Industry Performance
Key Energy Services, Inc. (NYSE:KEG) saw massive losses of 16.78% after the company missed badly after reporting earnings. The problem with Key Energy Services, Inc. (NYSE:KEG)’s earnings weren’t only its results, but rather it continued to validate weakness that has been seen throughout the industry. The company saw quarter-over-quarter and year-over-year losses in revenue, earnings, and EBITDA, which then sparked loss in the stock.
If we break down the company’s results by segment, then the U.S. declined 3% and Mexico reduced all of its total activity. The company did say that it expects activity to increase later in the year, but at this point, the company is making a prediction on unknown macro conditions. Personally, I find its price/sales of 0.57 and its forward P/E ratio of 7.38 to be attractive. However, its earnings were among the worst we’ve seen in the industry, meaning I’d see value in one of the other oversold and undervalued stocks in its space, and not Key Energy..
An Undervalued Stock with Low Expectations to “Buy”
Cirrus Logic, Inc. (NASDAQ:CRUS) lost 8.92% of its value on Friday after posting earnings that missed expectations. The company’s sales increased 87% year-over-year, yet the stock trades with a price/sales ratio of just 1.77. Hence common sense suggests the stock is presenting value. However, the problem is not current growth, or valuation, but rather long-term guidance and its dependence on Apple.
In FQ4 Apple made up 85% of the company’s total sales, which means that Cirrus Logic, Inc. (NASDAQ:CRUS) is highly connected to the fundamental growth and performance of Apple. While that number is expected to decline in coming years, there is a transition occurring, as the company states that it expects growth to be flat to moderate in 2014.
Personally, I love the technology of Cirrus Logic, Inc. (NASDAQ:CRUS), including its new LED controller chips, but admit that it needs to expand. With that said, the stock trades at just 7.50 times earnings, which is a 50% discount to the S&P 500 following its 55% six month decline, and I believe the market has priced in the worst case scenario. At this point in time, the stock is volatile, therefore I say wait a month for the stock to consolidate and then “buy” this cheap stock, but only a small position.
Online Retailer Seeks Stock Fall Lower
The company whose earnings can usually do no wrong, Amazon.com, Inc. (NASDAQ:AMZN), saw a 7.24% loss on Friday. In the past, poor margins have been forgiven for strong revenue, but for the first time, the company posted weaker revenue and stronger margins, and the market was not forgiving. The company saw total revenue rise 22%, 26% in the U.S., and a 260 point basis point increase in gross margin, which was not enough to satisfy the market.
There’s little denying that when you look at Amazon.com, Inc. (NASDAQ:AMZN)’s quarter and its growth, that this is a great company. The problem is that Amazon.com, Inc. (NASDAQ:AMZN) has a great company’s valuation, and when combining international weakness with fear surrounding the future of sales tax relative to its business model, investors finally took profits. Now, I for one don’t think its price/sales ratio of 1.95 is too expensive (especially compared to eBay’s price/sales over 4.50). However, growth is decelerating as the company grows, and I don’t consider it a “value” stock. Hence I would not buy on this weakness, and would be wary of a larger sentiment shift following its quarterly report.
Conclusion
In my book, Taking Charge With Value Investing (McGraw-Hill, 2013) I discuss the process of buying after earnings, and from all possible angles. One angle being after a stock trades lower, as this can often present value when a stock trades illogically. While there are many steps in successfully identifying when a stock trades illogically, the best step is also common sense: Simply read the report and listen to the conference call first before looking at the stock. Then, you can determine if the quarter was good or bad, and you’ll be one step closer to finding great post-earning value.
The article A Look at Three Post-Earning Decliners: Are Any Presenting Value? originally appeared on Fool.com and is written by Brian Nichols.
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