The Daily Workshop Report
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (Sept. 25, 1997) -- Nearing the conclusion of our odyssey through the Stocks Screens offered in the Foolish Workshop, we come upon the Missed Estimates screen. Like the Beat Estimates group we have discussed over the past three days, Missed Estimates comes in two configurations -- alphabetically or by declining percentages. In this screen we are looking for companies that are not meeting earnings estimates as potential investments, mainly with an eye toward shorting.

The well-established "cockroach" theory holds that where there is an earnings surprise, it is only the first of many. While this is great for companies that beat expectations, it is not so great for companies that miss expectations. Although sometimes you may find a company that has been unfairly bashed because of ridiculously persnickety quarterly expectations, most of the time the first negative earnings surprise is the beginning of a jagged, downward path.

In this week's Missed Estimates screen we have four lovely contestants: PERIPHONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PERI)") else Response.Write("(Nasdaq: PERI)") end if %>, MATERIAL SCIENCES CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MSC)") else Response.Write("(NYSE: MSC)") end if %>, ENNIS BUSINESS FORMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EBF)") else Response.Write("(NYSE: EBF)") end if %> and ROWE FURNITURE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROW)") else Response.Write("(NYSE: ROW)") end if %>. As I do not know all that much about any of these companies, we are going to take them from the top and move on down. We will look at their press releases, check what happened to the stock after the disappointment, try to figure out why they disappointed, look at the financials if the story is interesting, and finally check out their current earnings estimates to get a sense of how the Street is currently looking at the stock.

Periphonics fell $2 7/8 to $10 7/8 yesterday after reporting a 3% year-over-year decline in revenues. The company, which makes equipment to integrate computers and telephones, only earned $0.01 per share on $22.6 million in revenues. Net margins shrank to a microscopic 0.4%. The problem? Gross margins declined while operating expenses exploded. In spite of the fact that research and development spending fueled quite a bit of this rise, selling, general and administrative expenses rose 20.8% even as sales dropped.

Periphonics claims that the first quarter's order rate was disappointing because several large customers "pushed out" orders of significant size late in the quarter, explaining why spending was not in line with sales growth. Unfortunately, sales growth last quarter was only 12.7%, down from the 20% to 30% range the company had been recording. Although the company says it can do 20% to 25% sales growth in the second half, there appears to be something more at work with Periphonics than mere customer order movement.

Estimates of $1.02 per share for this year and $1.25 per share for next year will certainly come down substantially, as the company does not expect to do much better next quarter. This company would go on my research list as a strong short possibility, but I would want to research the product better to figure out why it was having sales problems. When a financial model becomes derailed, very rarely does the company get back on track after only one bad quarter.