Take an OPEN-Minded Look At Earnings

By Chad Henage - May 2, 2012 | Tickers: BWLD, OPEN | 0 Comments

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I'm constantly amazed at the fact that in today's market, good is never quite good enough. I've seen multiple companies report earnings that beat expectations, but their stock drops in the short term. I've also seen companies miss expectations, and their stock moves up on a brighter than expected outlook. In the long run I'm convinced that longer-term trends win out, and this market is filled with very short-term thinking investors. That being said, let's look at an example of a company that beat EPS expectations, yet the stock is taking a big hit, OpenTable (NASDAQ: OPEN).

The headline numbers for OpenTable weren't bad at all. The company reported a 17% increase in revenues, and Non-GAAP EPS of $0.40 per share. I've heard that the reason the stock is selling off today is because of worries over the company's expectations for full year 2012. Before we get to that, let's look at some longer-term trends in the business and see how OpenTable is doing.

While the company reports in two different segments, North America and International, I prefer to look at the figures as a whole to see how one plays against the other. There are two key metrics that really define OpenTable, those are total installed restaurants and seated diners. I think that the market has trouble figuring out what to do with these figures. Let me make it easy, if you were looking to invest in a restaurant stock, you would want to know what number of new restaurants are they going to open. The number of new restaurants opened for a company like Buffalo Wild Wings (NASDAQ: BWLD) is similar to the growth in installed restaurants with OpenTable. In the same way that Buffalo Wild Wings expects to open about 100-110 new restaurants in each of the next 5-7 years, OpenTable hopes to sign a certain number of restaurants each year. If you are looking for a good comparison to seated diners, think about this like same-store sales at a restaurant. OpenTable wants to seat more diners each year, restaurants want to seat more diners to increase their same-store sales. Given that context, look at the charts of OpenTable's total installed restaurants and seated diners over the last 5 years.

As you can see, the company has been growing these two metrics by an average of 34% and 41% respectively in the last five years. The company had an exceptionally good year in 2010 and then reverted back to about its mean growth in 2011. With analysts expecting revenue growth of about 20% and EPS growth of near 30% going forward, this seems reasonable.

Where the company's 2012 guidance is concerned, I believe the market needs to make rational adjustments based on percentages. As of this writing, OpenTable is trading down nearly 16% on news that the company should report the following versus estimates:

The market is marking down the stock by nearly 16% on news like this? The worst case scenario is OpenTable would miss revenues by up to 6%, and the company would miss full year earnings by 2.6%. Why exactly then is the stock worth 16% less today? Keep in mind that the company has beaten estimates in 3 of the last 4 quarters by an average of over 15% per quarter.

At the current price of $36.73 if management's guidance is correct, the company sells for between 22.39 and 24.65 times 2012 earnings. While this may not be a spectacular bargain, keep in mind this is the same company expected to grow earnings going forward by nearly 30%. In case you don't believe EPS is a valid way to track the company, consider that free cash flow jumped 35% between 2010 and 2011. Just because the numbers projected aren't what you expected, doesn't mean the company is worthless. Investing after all requires an OPEN mind.

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