In cost-competitive markets, managements often need to decide to
pursue either market share or firm pricing. One approach can
preclude the other. Management at
MEMC Electronic Materials (
, which had been smarting from lost market share in recent years,
chose to win back customers - at the expense of price. Bad move.
First-quarter sales were above plan, and the volume of silicon and
solar wafers (used to make chips and panels, respectively), were
well above analysts' forecasts. But that's because of a decision to
low-ball pricing, which crushed profit margins. The net result: a
small loss instead of an expected small profit.
I thought management would be able to finesse the dynamics between
profitability and market share when I wrote this piece in
mid-March. Management maintains that profit margins will eventually
rise as there is now more room for price increases. But investors
remain dubious, pushing shares down nearly -15% this morning. At a
minimum, shares are dead money for at least the next three months,
until management can prove that MEMC can take market share and
bolster profit margins.
As part of the healthcare overhaul, Uncle Sam envisions a much
better usage of internet-era technology in doctor's offices to save
money when processing medical information. And that led investors
to flock to companies such as
AthenaHealth (Nasdaq: ATHN)
that provide web-based medical software. Those hopes may ultimately
prove to be correct, but growing pains in this still-nascent market
should be expected. AthenaHealth is surely feeling them: sales rose
at a nice clip in the first quarter, but expenses are also growing
quickly. Too quickly for many investors, who pushed shares down
nearly -20% in Friday trading.
Even after the sell-off, shares still trade for more than 35 times
projected 2011 profits of around $0.80 per share. (The consensus
forecast of $1.15 is likely to come down). Rival
Allscripts-Misys (Nasdaq: MDRX)
also looks fairly expensive on an earnings basis, and investors may
eventually also mark that stock down if they see AthenaHealth and
Allscripts as suffering from the same growing pains. Allscripts
won't weigh in with quarterly results until late June.
McAfee Software (
are also down double digits this morning after the company missed
analysts' forecasts. The quarterly shortfall was fairly minor, and
a lack of management credibility is the real culprit. McAfee's
anti-virus software accidentally crashed a lot of Microsoft-based
computers by poorly identifying a new feature in the latest Windows
operating system as a bug. The issue was poorly communicated to
investors, leaving analysts red-faced with anger. Analyst emotion
can often dictate a rating, and in this case, the damage is more
limited than the sharply negative analyst reaction might indicate.
Of course, the company will need to woo back those analysts for
shares to rebound.
Shares of McAfee appear very reasonably priced at around 12 times
next year's profits, which assumes that the current consensus
profit forecast will fall from $3.00 to around $2.90 in coming
sessions. Once the analyst anger abates, the long-term growth
dynamics of the company should come back into focus, pushing shares
back up past the $40 mark. It's important to remember that we may
be on the cusp of a strong PC upgrade cycle thanks to Microsoft's
new operating system, and McAfee would be a clear beneficiary of
such a spending upgrade.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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