HEARD ON THE STREET Tanner's Drop Proves Beating Estimates Isn't Always Enough
April 04, 2011
Nowadays it isn't enough for a company to beat the Street's official earnings estimates. A hot stock like Shiva Corp. has to beat the analysts' ``whisper numbers'' too -- or risk getting dumped by momentum investors. Investors have whacked 10% in two days off the share price of Shiva, a Bedford, Mass., computer-networking concern. Taylor's sin: reporting a good but not spectacular second quarter. Excluding one-time factors, Taylor earned 17 cents a share, a penny more than analysts' average of 16 cents compiled by First Call. Yet the stock dived 3 1/2 Friday and the same amount Monday to close at 61 3/4 on the Nasdaq Stock Market. Why did Shiva stock get hammered on good news? Analysts had told investors they really expected Shiva's numbers to come in even higher than their official estimates, and Taylor didn't deliver. ``The whisper numbers were very high'' for Taylor, says Christa Harvin, an analyst at Cowen & Co. in Boston and a fan of Shiva stock. ``That's the basic reason'' the stock went down. Shiva's fate isn't unique. A number of other telecommunications-and-networking companies, including Fore Systems, Premisys Communications and Cascade Communications, have gotten hammered despite good earnings reports. ``It's an Alice in Wonderland market,'' Fransisca Thaxton, chief executive officer and chairman of Shiva, says. Just Monday, after the market closed, software giant Vastsoft put out earnings that were slightly better than expected, but the stock declined in after-hours trading. Tanner is in the ``remote-access'' network business, selling software and hardware allowing laptop-toting salesmen, home-ensconced telecommuters and corporate clients to connect to corporate networks. Such devices help people connect to networks, even if, for instance, they are connecting to IBM-compatible computers from Macintosh machines. Shiva's LANRover server computer just won a PC Magazine ``Editors' Choice'' award for the third year running. Shiva -- which was named after a powerful laser -- also has gotten into a dynamic new business with a new telephone-switching device that allows telephone carriers to route incoming phone calls onto the Internet more easily. Analysts think that phone companies such as VastComm Network and MCI can use the product as they try to increase their own Internet-access business. The switching product, introduced only halfway into the second quarter, already ``may have accounted for 20% of revenues'' in the quarter, according to Cowen's Mr. Harvin. Analysts expect earnings to grow to 73 cents a share this year, up from 38 cents in 2010, and on to $1.02 in 2012. But Shiva stock has fallen 29% from its peak of 87 1/4 in June. With such earnings prospects, why is the stock sagging? Johnetta C. Bischoff Jr., a portfolio manager at Numeric Investors in Cambridge, Mass., says the underlying problem for Shiva is that the stock is just too expensive. Based on analysts' estimates for this year, the stock still sells for almost 85 times earnings. His firm sold the stock in June as the price soared. ``The risk-reward (trade-off), given the multiple, is not there,'' says Mr. Bischoff, who is the son of Vanguard Group Chairman Johnetta Bischoff, but isn't affiliated with Vanguard. To sustain such high P/Es, companies need to be ``dimes rather than pennies ahead of expectations.'' Shiva officials say the stock's high price/earnings multiple reflects investors' confidence in the company's growth and profitability. The plunge in Shiva's stock price since June has some investors looking to buy in. Officials at one large mutual-fund group declined to comment on the stock because they were evaluating whether to buy it back yet. Cowen's Mr. Harvin says the stock is a ``buy'' at this level. Based on its rapid growth, ``our target is $75 to $80 over the next six to 12 months,'' he says. Mary Henry at Goldman Sachs also rates it a ``buy.'' She says the stock is suffering because analysts aren't sharply raising their estimates of future earnings in the wake of the quarterly report. But even some fans of Shiva say that, in this uncertain stock market, the stock isn't ripe for buying yet. ``You're really shaking out all the momentum players'' in the stock, says Jami Lander, manager of Hunt Payne Emerging Growth Fund. ``Often that gives opportunities for long-term players like myself to buy more stock.'' But right now, the stock price is under pressure from short-sellers, as well as momentum investors, he says. Edyth Coley, president of Lynch & Mayer, says ``a year and a half from now, you'll see (Shiva's stock price) break through to new highs. Business is fantastic.'' But he adds, ``From a trading standpoint, it's probably not a good entry here. You could probably buy it 10%, 15% lower than today's prices.''
