by Hilary Kramer | November 20, 2013 8:00 am
Two of our GameChanger companies moved sharply on earnings earlier this month after reporting financial results, and I’m putting out this alert to recommend that you sell both companies as a way to lock in profits and cut losses, respectively.
Let’s take a look at both companies and discuss why we need to move our money out:
First, Solera Holdings (SLH) shares popped around 12% on strong quarterly numbers and guidance that showed continued execution of the company’s Mission 2020 plan. Fiscal first-quarter EBITDA margins of 41% were actually ahead of the plan’s goal of 40%, driven by a more efficient U.S. software business and signs of recovery in Europe.
Management also raised its guidance for the fiscal 2014 year, adding to the enthusiasm of the good results. Shares have now moved above $65 per share, and with so much good news priced into the stock, valuation is getting a bit stretched. Shares look due for a rest after the recent surge of momentum, and locking in any gains makes sense now.
I’m also recommending that you sell ION Geophysical (IO), which dropped on a surprisingly disappointing third quarter.
Looking at the numbers, IO reported a net loss of 13 cents per share excluding charges, versus its own previous guidance and consensus of a gain of 5 cents per share. The culprit was a rapid decline in sales, which at $79 million was far short of the $127 million expected. It appears new venture activity is weakening, which means that large clients are pulling back on new data acquisition programs, while more competition creeps in from smaller contractors.
To me, this spells price competition that simply isn’t profitable for IO to engage in, even as the company has been debuting new software suites in recent weeks. In addition, there have been some push outs in new mapping projects internationally. Although delay does not mean cancellation, it does show that achieving double-digit earnings growth that I had hoped IO would earn over the next few years is likely out of reach.
IO’s report definitely changes my outlook, as such a rapid sales decline and an irrational competitive landscape may prove to be too tough to overcome. The large quarterly miss also signals to me a lack of visibility, and the fact that management is not giving concrete guidance for this quarter tells me it’s not worth waiting around for the stock to rebound. These latest developments mean there is now too much uncertainty surrounding the stock, I want to sell because the stock appears to be dead money in what is a softening seismic environment.
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