As first-quarter earnings come to a close, I can’t help but point out that the majority of earnings reports we’ve covered over the past year have been better than expected. With so many companies reporting during the weeks that comprise earnings season, it’s easy for some earnings reports to fall through the cracks.
Each week for the past year, I’ve taken a look at three companies that could be worth further research after either beating or missing their profit expectations. Today, we’ll take a gander at three more companies that reported earnings last week. They may have slid under your radar, but they deserve a look.
| Company | Consensus EPS | Reported EPS | Surprise |
|---|---|---|---|
| Red Hat (NYSE:RHT) | $0.30 | $0.36 | 20% |
| Five Below (NASDAQ:FIVE) | $0.38 | $0.39 | 3% |
| JA Solar Holdings (NASDAQ:JASO) | ($1.53) | ($2.65) | (73%) |
Source: Yahoo! Finance.
Red Hat, Inc. (NYSE:RHT)
Following Red Hat, Inc. (NYSE:RHT)’s fourth-quarter earnings results, which delivered a 20% EPS beat but a $1 million revenue shortfall — and had the company down double-digits in percentage terms in after-hours — I figured we had yet another Oracle Corporation (NASDAQ:ORCL) situation on our hands. If you recall, Oracle shares were decimated after it warned of weakening software and hardware growth as it deals with increased hiring and the ongoing struggle of amalgamating Sun Microsystems’ hardware into its fold. However, if you look more closely at Red Hat, Inc. (NYSE:RHT)’s report, you’ll find out that all is actually well.
All credit goes to my Foolish colleague Anders Bylund for his deeper dive into Red Hat, Inc. (NYSE:RHT) following its earnings report. Anders notes that Red Hat has taken a more conservative approach to its accounting whereby it’s recognizing and allowing its larger multimillion-dollar-contract customers to make payments throughout the year instead of just one lump-sum, up-front payment. This serves to normalize revenue and boost backlog while also making Red Hat’s 17% quarterly revenue boost seem tamer than it actually was.
Red Hat’s razor-and-blade business model is also unique in that it relies on its open-source software to do all the talking and practically all of its marketing for the company. By allowing for free downloads of its software, it leaves enterprises free to customize and examine how Red Hat’s Linux-based platform will work for their business. If enterprises choose to upgrade to a paid version, Red Hat locks them into a recurring revenue stream with service and upgrade revenue potential.
Red Hat is a transparent company with a down-to-earth CEO, loaded with plenty of happy employees, and complete with oodles of perks. In short, it looks poised to continue its outperformance moving forward.
Five Below Inc (NASDAQ:FIVE)
It was definitely the strong Christmas season that investors in specialty retailer Five Below Inc (NASDAQ:FIVE) had hoped for. Net sales increased by 38% to $173.6 million and net income increased to $19.2 million from $12.4 million in the year-ago period, slightly surpassing estimates. However, Mr. Market doesn’t sell magic wands for less than $5 (Five Below’s product price cap), which made Five Below Inc (NASDAQ:FIVE)’s same-store sales results and full-year forecast a little tough for investors to stomach.
For the quarter, Five Below Inc (NASDAQ:FIVE) delivered same-store sales growth of just 4.4% despite the 38% rise in total sales noted above. Excluding the 52 new stores opened during the year that helped boost sales higher, this figure of 4.4% gives investors a truer organic growth factor to examine. Furthermore, this figure was notably lower than the overall 7.1% same-store sales growth experienced over the course of its fiscal 2013 and is expected to drop to 4% for the entirety of fiscal 2014.
The nail in the coffin for Five Below was its full-year forecast of an adjusted profit of $0.62 to $0.65, which was well below the $0.70 Wall Street had expected.
Simply put, Five Below has outperformed expectations up until now, but, as I warned in November, growth estimates are slowing and its costs are rising as it expands its brick-and-mortar locations. At a median point of its EPS projections, Five Below is trading at 60 times this year’s earnings despite projected organic growth of just 4%. Can we say “overvalued”? — because I certainly think so!
JA Solar Holdings Co., Ltd. (ADR) (NASDAQ:NASO)
Imagine your worst nightmare and then magnify that by a factor of 10. That would be a pretty good representation of the investable horrors of investing in Chinese solar manufacturers at the moment. Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP), for instance, defaulted on a bond payment, which necessitated the parent company placing its solar manufacturing subsidiary Wuxi Suntech into bankruptcy at the behest of eight Chinese lenders. Needless to say, expectations for JA Solar’s fourth-quarter report weren’t high, and it still missed by a mile!
Total shipments of 500 MW did exceed the company’s previous estimates, but overcapacity wreaked havoc on margins and pricing and pushed losses well beyond the Street’s expectations. Unlike Suntech, JA Solar, with its roughly $483 million in cash, is expected to be able to make a $123 million bond payment in mid-May, but that’s still no consolation for a company burning through its cash on hand at an incredible rate.
There has been a clearly defined shift away from Chinese solar firms — which took on insurmountable amounts of debt to expand capacity that is now sitting idle — to U.S. firms like First Solar, Inc. (NASDAQ:FSLR) that have conservatively worked to obtain large domestic contracts and remained predominantly cash flow positive. Proposed energy initiatives emphasizing the benefits of U.S. energy independence should be a boon for U.S.-based solar panel manufacturers. The same can’t be said for China, which hasn’t quite reached that renaissance yet and is dealing with an oversupply issue that refuses to go away.
To summarize: Make no mistake about it, this earnings miss is not an opportunity to pick up JA Solar shares on the cheap.
The article 3 Earnings Reports That Caught My Attention Last Week originally appeared on Fool.com.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. 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 Oracle.
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