Buy or Sell? Wednesday's Losers: DY and FRO
It's often profitable to find stocks that continually exceed profit forecasts. Yet once such a pattern is established, a company is unwise to break the trend. Investors come to expect pleasant surprises and won't tolerate a shortfall. So when engineering services firm Dycom announced fiscal fourth-quarter results that were just a tad shy of forecasts, investors seem to have been caught off guard. After all, Dycom had blown past consensus profit estimates by at least 25% in each of the past four quarters. The net result: Shares are down more than 15% this morning.
A further look into the quarterly miss reveals a clear trend. The business under the company's control (installation of telecom and other utility systems) fared reasonably well, with sales rising 9% from the prior year's fiscal fourth quarter. Yet the business that is out of the company's control (storm restoration services) didn't fare as well.
A lack of natural catastrophes was to blame, yet as we take note of the damage currently being wrought by Hurricane Isaac, we know this business can turn on a dime. That storm, coupled with any others we might see in coming weeks, could easily lead this segment to deliver strong enough results in the current quarter to return Dycom to its estimate-beating ways.
The tanker glut continues
For the owners of ships that carry crude oil, the long nightmare continues. The number of oil tankers plying the seas has doubled in size since 2004, even though the volume of oil being transported across the globe hasn't risen nearly as much. As a result, it's become a buyer's market as oil companies can negotiate ever-lower rates for the lease of ships.
The brutal industry conditions have led to another quarterly shortfall for Frontline, which lost $24 million in the second quarter, much higher than the consensus forecast of a $3 million loss. Of course, a company can't lose money in perpetuity. Frontline carries more than $1 billion in debt, and is now taking cash-preserving moves such as suspending its dividend (for the second consecutive quarter).
Various industry reports over the past six months have suggested that industry consolidation will eventually help weak players such as Frontline as they put ships up for sale. Don't believe it. Whenever an industry is in deep distress, buyers know that they can pick up assets at a much better price in bankruptcy court. This isn't to suggest that Frontline is headed toward bankruptcy, per se, only that it would be unwise to expect a White Knight.
Looking to bottom fish this broken down stock? Don't bother. "Based on results achieved so far in the quarter and the current outlook the board expects the operating result in the third quarter to be significantly worse than in the second quarter," noted the company in a statement.
Action to Take --> There's a huge difference between Dycom and Frontline. The former is just suffering a flubbed quarter that perhaps had been anticipated to be another estimate beater. And considering we're always just a major storm or two away from needed infrastructure repairs, the current quarter or the next one could just as easily be a healthier one. Frontline, on the other hand, is in the midst of an extended period of pain that shows no signs of abating.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.