Earnings Take Their Toll

Whew! The last seven days have been a whirlwind for investors, as a series of disappointing earnings and guidance became too much for the market to bear. After a couple of severe drops, Wall Street seemed like it got some footing back today, closing out the day in positive territory.

This earnings season has been a difficult one, to say the least, but it’s not EPS results that are having an impact. In fact, 69% of S&P 500 companies have beaten their estimates. Instead, it’s revenues that are causing the problem, with 60% of companies coming up short, including many high-profile cases like Google (GOOG), as the global economic impact on business is being felt.

These are the pullbacks I’ve been telling you to expect, and unfortunately they hit lower-priced stocks the hardest. But we also get the benefit of strong bouncebacks when the market inevitably turns again, and I continue to recommend you use any downturns as buying opportunities. (For my top suggestions, check out my Fourth-Quarter Best Buys).

The good news is that we are now through the bulk of market-moving reports after Amazon.com (AMZN) and Apple (AAPL) released results tonight. Although both companies came up short of estimates, shares are trading moderately lower after hours, so I don’t expect any significant negative impact from them when the market opens tomorrow.

Now that we’re almost through the historically-weak months of September and October, it’s important to keep in mind that the market is still holding up quite well. The S&P is up slightly over the last two months, and up 12% on the year. I’ve been impressed by how the market has held onto gains in the recent volatility, and believe this demonstrates the strength it can continue to show throughout the end of the year. The Federal Reserve reiterated yesterday that it will maintain extremely low interest rates through 2015, which should help the market be able to digest modestly-reduced earnings expectations without a severe correction, and calm in Europe continues to be a key factor in keeping the market out of panic mode.

With many of the bellwether earnings largely behind us, the market will now turn its attention to the presidential election and a hopeful settlement of the fiscal cliff. For us here in Breakout, our attention is just turning to earnings since small-cap stocks generally release results later in the season. We’ll begin to see reporting activity pick up in the near term, starting with the three companies on our Buy List that reported this week. Let’s get right to the results.

Breakout Earnings: CBZ, NR, WIBC

CBIZ (CBZ) reported overall solid third-quarter results this morning, but shares closed down 4.5% as the thinly-traded stock met with some volatility in this seasonally-slow quarter.

Earnings from continuing operations were $0.11 compared with $0.10 a year ago, and cash EPS, which excludes the company’s considerable amortization of intangible assets, was $0.26 versus $0.24 a year ago. Revenues were up 3.6%, or 0.8% excluding acquisitions. Lower margins of 9.9% (down from 10.8% last year) may also have contributed to the sell-off, but included investment for growth in CBZ’s financial services business.

Management was upbeat on the conference call, saying they were very satisfied with the results, which they feel bodes well for the future. The acquisition pipeline is strong, and there is more than enough dry powder available in the company’s new credit line. Pricing pressure still exists in the medical management sector CBZ serves, but volumes are starting to pick up. While the fourth quarter is highly unpredictable due to seasonal slowness in their financial services business, management believes the company can beat last year’s Q4 loss of $0.02 a share.

I was also satisfied with this quarter, and see CBZ as the cheapest stock on our Buy List and a compelling value. While I would prefer to see the company use capital to reduce debt rather than make further acquisitions, I was encouraged by the gain in operating income and we are starting to see benefits from the scale gained through acquisitions.

Shares did drop today, but the solid report tells me we should use this as an opportunity to buy CBZ under $5.65.

Newpark Resources (NR) capped off today’s 5% bounce with an after market close earnings beat. Excluding a tax benefit, EPS for the oil services company came in at $0.19, down from $0.23 a year ago but $0.02 better than expectations. Revenues were just shy of $260 million, and essentially flat with last year’s results.

The Mats division showed some strength, with operating income of $16 million versus $14.5 million in 2011. While operating income in the critical fluids division declined to $14.8 million from $25.6 million last year, it is encouraging to note that the division’s operating margin rose sequentially to 7% from 6.7%. In the Environmental Services segment, operating income declined to $3.1 million from $5.0 million.

After a tough week, the stock looked much better today, and these results could be a nice catalyst for further improvement. The company’s conference call is tomorrow, and I will let you know of any important developments that come out of it. NR remains a good buy below $7.60.

Wilshire Bancorp (WIBC) got a boost on Tuesday after reporting a solid third quarter, including earnings of $0.54 versus $0.31 a year ago. Excluding income from loan provisions, as the company’s credit outlook continues to improve and an extraordinary tax credit in the quarter, EPS was approximately $0.20 compared with $0.17 last year.

Loan growth continued in the quarter, which helped the net interest margin increase to 4.35% from 4.13%. Also helping with net interest margins was an increase in non-interest bearing deposits. Non-accrual loans fell to $38.9 million in the quarter, down from $1.5 million in the second quarter and $56.5 million in the prior year. On the conference call, management said that credit conditions continue to improve, and there is a possibility of another negative credit provision in the fourth quarter.

The company continues to have a very strong balance sheet, and is in a good position to enhance shareholder value through the resumption of a dividend or a share buyback at some point in the future.

WIBC has reversed all of its valuation allowance against its deferred tax assets, and expects to recognize taxes at its traditional rate of 37%-38% going forward. Therefore, the $0.20 of EPS in the current quarter will translate into a quarterly run rate of $0.125-$0.13 a share in the future. While credit will remain benign, the income could be pressured by narrower interest margins and reduced loan growth, as loan originations did slow in the quarter. As a result, current 2013 earnings estimates of $0.58 may be a little too high, although $0.52-$0.55 would not be unreasonable.

In the meantime, the stock should get support from the possible utilization of excess capital and the potential of a merger with another Korean-American community bank. Continue to hold WIBC as we target $7.50.

Breakout News & Notes: CVC, OPK, UVE

Cablevision (CVC), along with former subsidiary AMC Networks (AMCX), reached a settlement with Dish Networks (DISH) in a legal dispute involving the now defunct Voom HD, which was a package of HD channels launched by Cablevsion. CVC and AMCX sued Dish for $2.4 billion back in 2008 after the companies had a disagreement over the terms of the contract Dish signed to broadcast the Voom HD Channels, leading Dish to drop Vroom, which went out of business in 2009.

Under terms of the agreement, the companies received $700 million in total, but it was not disclosed how much each would receive. I should have a more definitive number when Cablevision reports earnings next week. The stock has been a very strong performer in October, and I recommend continuing to hold CVC for our $22 target.

Opko Health (OPK) announced it will acquire Nashville-based Prost-Data for $40 million, consisting of $30.6 million in OPK stock and $9.4 million in cash. Prost-Data and its OURLab affiliate have 18 blood drawing centers throughout the United States that are primarily used by urologists. Opko intends to use the labs for a new launch of 4Kscore, a new way to detect prostate cancer aimed at reducing the number of unnecessary biopsies. 4Kscore has already been launched in Europe.

This is an interesting acquisition, as it leverages an existing business of OPK, and appears to be a smart move for the company and I’m hopeful we’ll see more in the future. OPK is a buy under $4.75.

A Note on UVE: I am sure some of you who own Universal Insurance Holding (UVE) may be concerned about the impact of Hurricane Sandy, which is currently hitting Cuba, could have on the company. As we go to press, it looks like the storm will weaken Friday morning, with winds of 40-50 MPH along Florida’s East Coast. For now, I think any liability for UVE from the storm will not be significant, but I will continue to watch closely and keep you updated.

Sincerely,

Hilary Kramer
Editor, Breakout Stocks Under $10