Revenue was up 16% to a record $8.1 million BUT.... EPS was down 10% to only 9 cents due to margin erosion caused by the new Select Comfort agreement. Apparently the new agreement went into effect immediately and affected orders that were already in the pipeline.
As I predicted earlier this week, I don't think the market is going to like the results. Lets see how the stock reacts.
I went back and checked the press release on 22nd March. You are correct. This is from the release on that date.
<<<<<< Winland Electronics Inc. said Wednesday it has signed a new three-year agreement with Select Comfort Corp. Under the deal, Mankato-based Winland will manufacture approximately 50 percent of all electronics assemblies for Select Comfort, maker of the Sleep Number adjustable-firmness bed. Winland will also remain the exclusive supplier of all products it manufactures for Plymouth-based Select Comfort through at least June 30.
The new agreement immediately replaces a previous agreement that was set to expire in August. Winland has revised its prices and will see a lower margin as a result.
The deal calls for periodic performance reviews for quality, delivery and price.
Published March 22, 2006 by the Minneapolis/St Paul Business Journal >>>>
They gave up the remainder of their old contract through August for the new agreement.
I re-read the press release, and here is a quote from it: "gross margins decreased due to lower margins from the Comapny's new agreement with Select Comfort". That can only mean one thing. The new agreement (including lower pricing) superceded the old agreement and is ALREADY in place. We saw the impact of the new agreement on Winlands's bottom line in this latest earnings report. Yes, it hurts, but the good news is that the Company remains profitable.
For the next three quarters, expect to see tight EPS comparisons, as revenue growth in new products struggles to offset margin reductions attributed to the new SC contract. Beyond that, bottom line growth will resume, possibly at an accelerated pace, and WEX will be back.... only this time, they will be far less dependent upon a single customer for their financial well being.
As I see it, Winland's growth story remains intact. Wombat is right, it could be a bumpy ride for a while, but once it is clear that the Company can remain profitable despite the significant challenge that SC presents, I think Wall street will reward WEX with a higher multiple, and a double digit stock price (at least). This one is definitely worth holding for the long haul.
It's interseting that we survived a test of the 50 day moving average today and closed above it. From a technical standpoint, this stock is still healthy. Whether this is a buying opportunity or not is anyone's guess. I tend to wait after a negative reaction like this (to earnings in this case), because a better buying opportunity usually presents itself within a few weeks or months of the event.
I continue to believe in this company and it's management. It is a cheap stock, but Select Comfort adds a dimension of risk, and that is why I think it sells below $10 for now. If the Select Comfort story plays out better than expected, I do believe that we can go to $10+ next year, and that is why I am still holding a partial position.
Good luck to longs (and shorts for that matter). I would love to hear updated perspectives from some of our old timers (Monty and others).
I agree. We had the usual quarterly run-up in anticipation of earnings like the prior quarter and they never materialized. I anticipate a significant sell off. Probably time to move on. Good luck to all longs.