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  • billy_berew billy_berew Mar 31, 2011 11:11 AM Flag

    Large Earnings Miss Expected for 1Q 2011

    I've run the numbers and I believe that OPEN will definitely miss the consensus estimate of $.23 per share for 1Q 2011. I am getting $.19 per share with reasonable assumptions. The difference largely relates to the tax expense. The tax expense for 3Q and 4Q of 2010 was very low because of some one-time tax refunds they requested. This reduced the tax rate to below 10% for both quarters. However, the real tax rate going forward will be upwards of 25%, and I don't believe the analysts are factoring this in. Run the numbers and I'm sure you'll reach the same conclusion.

    What will a large miss do to the stock price?

    My computations assume there will be no drop off in sales growth. Thus, if higher gas prices, bad weather, and the big drop in consumer confidence that was just reported had a negative impact on sales growth, the earnings miss will be even greater. Also, we've already the declining profit margins during 2010, as well as the drop in revenues per restaurant, which don't bode well for 2011.

    I believe management foresaw the problems with 1Q 2011 numbers, and that is why they chose not to provide guidance. Providing guidance would have tanked the stock a couple months ago. The day of reckoning is near. Since they chose not provide guidance, they probably have no obligation to pre-announce the earnings shortfall from consensus, but this will likely tank no later than earnings week. If the bad news leaks out earlier, it could happen any time. I also think OPEN will be announcing layoffs. They don't need all the salespeople now that they've tapped 66% of the market already. If they don't, the overhead will kill margins even more in 2011.

    Finally, the NRA may be announcing its plans any time. It definitely doesn't like the idea of OPEN holding the industry hostage, while its stock trades at 24x revenue.

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    • Everybody needs to get out well before earnings. There is no way they can make the $.23 per share consensus estimate.

    • I am not sure if all these calculations matter that much.

      OPEN is heavily shorted

      every time it drops, shorts cover. Look at today as an example.. it just rose back up.

      many of those shorts will close out (take a lump) as soon as they have a chance... they are ready to cut their loss and walk away.

      If short interest is in the teens, I can see OPEN drops substantially... but with 30% of float.. it is hard to imagine double digit pct drop.

      It is not only about EPS for a specific quarter. It's all about the money flows and the "believed" prospect of the company..

      Lets imagine if they miss by 2 pennies, and announce a huge layoff + a plan for more acquisitions, I think it might even go up.

    • Wow, I agree. Seems plain as day to me. The only question is whether they have an obligation to pre-announce the earnings shortfall. I suspect they do. Now that the quarter is closed, the final numbers will be rolling up, and it will soon be apparent that they are going to fall far short of the consensus. At that point, you have to pre-announce or you have all kinds of insider trading going on as employees and their friends try to sell. This is such a highly watched company, it's reasonable to believe such information will be leaked unless you pre-announce.

    • I think you actually used a 40% tax rate in your calculation above, not a 25% tax rate.


      You should also note that on the conference call they said they were expecting expenses to increase about 15% in Q1 compared to 2010 Q4, so there should be $4,732,980 in net earnings before tax using your revenue number. So, even using the 25% tax rate, there should be $0.15 EPS in Q1. If you use the 40% rate, that drops down to $0.12.

    • Doing some further checking, I noticed my revenue estimate of $33.9M nearly equals the consensus analyst estimate of $33.5M. So the difference in my estimate and the analysts relates to the expenses. The earnings before tax has always been 81% to 82% the last several quarters, so I don't expect a change there, and I assume the analysts don't either. Therefore, the difference must relate to taxes. The bonehead analysts must be extrapolating from 3Q and 4Q 2010 tax rates, which were unusually low because of one-time items. This makes sense to me, because analysts don't know what they are doing when it comes to taxes. However, taxes are a real cost, and they should be properly factored into estimates. Huge earnings miss on the way. The earnings before tax will likely track estimates, but the EPS will be way lower. The market could shrug off the miss as attributable to taxes, but they will then have to revise all future EPS estimates down, and that could be harder for the market to handle.

      • 1 Reply to billy_berew
      • The more I think about it the more absurd it seems. I really find it hard to believe that the market missed this, and one goofball on YMB figured it out (no offense intended, your post is great). But it does really look like that's what happened.

        If you go back to November 1, 2010, this stock was trading at $60/share. On November 2, 2010, they reported earnings for Q3 with the much lower tax rate, which covered up quarter/quarter revenue growth of only 8.55% and turned it into quarter/quarter earnings growth of 48.41%, and in the last 5 months this stock has nearly doubled. But the Q3 and Q4 earnings really aren't that great, when you ignore the one-time tax savings. Growth in restaurants installed in N. America started to decline even, and margins have been declining as well as you note.

        I really can't see any reason for this stock to have doubled since November, except for (1) people ignoring the effect of the artificially low tax rates in inflating earnings, or (2) general market insanity regarding QE2 and some high-flying tech stocks. That, and momentum traders clearly saw an opening for multiple short squeezes with the extremely high short interest and "good" numbers coming out of the company each quarter.

    • That's a good summery of macro numbers...

      if you would like to share how you got to .19 for next quarter, please do elaborate.

      or if you don't want to make public, do email me.