Sunday, October 14, 2007

More background on Rogers Corp.

Having just featured Rogers Corporation (ROG) in a previous post based on the chart (TradeRadar BUY signal flashed) and a news announcement (third quarter earnings expected be well above previous guidance), I thought it would be a good idea to dig a little further and understand why the stock had lost half its value between last November and August.

In the fiscal fourth quarter of 2006, the company recorded record revenues and earnings but provided weak guidance, indicating unit sales would be flat, taxes annd labor costs would increase and there would be higher equity compensation costs. The stock began its decent at this point.

As predicted, earnings took a hit in the fiscal first quarter of 2007. Expenses were high and, despite increased revenues, the year-over-year income comparison suffered. The stock continued its downward path.

In the second quarter of 2007, there was little positive news. Revenue was lower than the previous year's quarter and the company showed a loss of $0.26 per share. The loss, however, was in large part due to restructuring costs. It was recognized that certain flexible circuit products had become a commodity and impairment charges were taken as staff was reduced and portions of the business were phased out. In a bid to reduce expenses, more production was moved to China but this incurred charges as U.S. staff was offered severance and plants were shut down.

The fourth and first quarters were enough to put the stock on a firm downtrend for the better part of a year. Interestingly, after the second quarter's earnings came out the stock bottomed and popped up into the $40's. Guidance from the company at the time indicated that many of the restructuring activities would begin to provide positive results soon, with most benefit to be seen in 2008. Investor's apparently believed the company and the stock has held on in the $40's since then.

As discussed in my previous post , third quarter guidance surprised to the upside and the stock jumped up to over $49. The company is fortunate to be the beneficiary of two trends. First, its international sales in the Custom Electrical Components division are seeing strength due to higher overseas demand in the power infrastructure and locomotive markets. Second, analysts have recently pointed to strong sales of cell phone handsets and continued strength in cell phone infrastructure. Rogers sells into these markets and is well positioned to benefit from a rise in demand.

So, if management can be believed, it could be that the worst is over for Rogers and the company is returning to profitability and growth. If that is true, this could be a good time to buy for reasonably patient investors.

Disclosure: author owns no shares of ROG



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