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Thursday, October 26, 2006

Plantronics: Don’t Fight the Tape?

By William Trent, CFA of Stock Market Beat

After posting a solid quarter due to strong margins, headset maker Plantronics (PLT) shares were up more than 8%, despite issuing poor guidance for the December quarter. Their EPS guidance of $0.25-$0.30 (after stock expense) on revenue of $205-$215 million compares to consensus estimates of $0.40 EPS on $228 million revenue. According to Yahoo! Finance:

Shares of Plantronics Inc. jumped more than 8 percent Wednesday, the day after the maker of communications headsets posted a solid fiscal second quarter with earnings above Wall Street’s expectations.Plantronics said the quarter’s earnings beat expectations thanks to a stronger product mix and lower expenses, even as revenue was in the middle of the company’s July outlook.

Baird analyst Reik W. Read upgraded the company despite its lower-than-expected third-quarter guidance.

Read upgraded Plantronics to “Outperform” from “Neutral,” thanks in part to “the positive revenue and margin trends” in the company’s call center and office segment, which accounts for 57 percent of total sales.Read said in a note to investors the company’s lower third-quarter guidance is due mainly to weakness in Altec.

We have also said that the key to Plantronics success lies in the office and call center market, which is why we (and the rest of the market) were so exasperated by their purchase of a consumer business (Altec) and excessive advertising spend, which management addressed in the conference call:

We did pull back; what we had found was that the overall adoption in the category was not appearing to rise as much as we had hoped….

So, we really scaled back a fair amount of that marketing, and put more effort into longer cycle innovation that we think can ultimately create a more compelling value offering, reduce some of the negatives. But having said that, there were still areas in the marketing that we thought were attractive… where we thought we were gaining some traction, and so we’ve narrowed our focus into those areas.

Which leads us to the crux of the issue: is now the time to buy? In our June valuation piece we said:

Therefore, although today’s valuation appears low, we will not be buyers again until it is lower still, or until we see evidence that the free cash flow is once again improving. A 3.6 percent free cash flow yield just doesn’t cut it when CDs are paying five percent.

With marketing spend down and margins up, the free cash flow improvement seems likely to follow. And with the ticker rising even on “bad” news, now probably isn’t the time to fight the tape.

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