Three Companies That Reported Earnings on Monday: Value or Value Trap?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Earnings can be the best period of opportunity in the market, as they often set the trend for the following three months. However, it can also be a trap. Therefore, I am looking at each of the below companies' performance to determine if these reactions are creating value or a value trap.

An Undervalued High-Risk Stock Gets Crushed After Earnings

Gordmans Stores (NASDAQ: GMAN) announced earnings on Monday after the market closed, and the stock is now trading with a 16% loss on Tuesday. The company posted a very strong bottom line number, beating expectations, but with revenue of $202.5 million, it was $320,000 short of expectations. The company’s top line growth was 9.4% year-over-year but net earnings fell 22% due to higher costs.

It appears as though a decline in gross margins, a rise in input costs, and SG&A expenses are pushing shares lower. Also, the metric that is most important to retailers, comparable store sales, was not in the company’s favor, as it declined 4%. Therefore, the company’s rise in revenue is due to the opening on new stores. My problem is that now with a P/E ratio of 9.00 and a price/sales ratio of 0.46 the stock is priced cheap, and I believe it would make a good, but small, investment due to expansion and because discounting was what hurt sales, not necessarily traffic, making it a value investment.

Restaurant Stock Rallies Despite A Lack in Value

Shares of the restaurant company Sonic (NASDAQ: SONC) rallied to new 52-week highs with gains of more than 9% after reporting earnings on Monday. When you look at the top and bottom line, you realize that its quarter was nothing spectacular, as both only met expectations. However, more importantly than EPS, was its net earnings, which soared due to lower costs offsetting a 4% decline in sales.

In some ways, Sonic’s quarter was the complete opposite of Gordman’s. Sonic did see a decline in sales but a further decline in all costs related to its business. Furthermore, the company saw a near 2% boost in same-store sales, which like I said, is often most important to investors. However, I don’t see value in its shares. This is a company that is posting year-over-year declines in sales, yet trades at 1.20 times sales. In my opinion, this is too expensive, and I don’t see anything to validate its P/E ratio over 20.0. In my opinion, a company with such metrics needs growth in order to present value.

Despite Loss there is Still Too Much Risk

JA Solar Holdings (NASDAQ: JASO) lost more than 10% of its value on Monday after reporting disappointing earnings. The company virtually missed on every metric, except revenue. It missed on the bottom line, swung to a massive loss in gross margins, guided for fewer shipments of cells and panels, and finally announced that it shut down significant capacity during the last quarter.

Back when 2013 first began, there were a lot of people who believed that solar stocks would be the top performers of the market. However, it is shaping up to appear as though this industry will continue to report disappointment, and JA Solar is a perfect example. At first glance, the company looks undervalued, being a $1 billion business with a $140 million market cap. However, the problem is volatility, inconsistencies, and its balance sheet. At this point, the company’s future could go either way, towards bankruptcy or towards improvement. Unfortunately, it’s hard to determine its correct path, and I view the stock as having way too much risk for a long-term investment.

Conclusion

When a stock trades drastically lower or pops significantly higher after earnings you must ask yourself “was the news worth the movement?” In my book, “Taking Charge With Value Investing (McGraw-Hill, 2013)” I discuss how far too often we make assumptions based on performance, a statement that is backed with countless studies on human behavior. But the best investors are able to use stock movement as an opportunity to capitalize on value. Therefore, as I’ve discussed often, when it comes to earnings, read the report first and then assess the performance second, and you will find inconsistencies you can profit from. 


Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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