48 hours only!

Join Pro Canada for roughly just HALF the entry price you saw yesterday…

Why Sierra Wireless Inc.’s Shares Are Down More Than 20%

Sierra Wireless Inc. (TSX:SW)(NASDAQ:SWIR), one of the world’s leading providers of intelligent wireless solutions, announced weaker-than-expected third-quarter earnings results after the market closed on November 5, and its stock responded by plummeting over 20%. Let’s take a closer look at the results to determine if we should consider using this sell-off to begin scaling in to long-term positions, or if we should avoid it for the time being.

The results that ignited the sell-off

Here’s a summary of Sierra Wireless’s third-quarter earnings results compared with what analysts had expected and its results in the same period a year ago. All figures are in U.S. dollars.

Metric Q3 2015 Actual Q3 2015 Expected Q3 2014 Actual
Adjusted Earnings Per Diluted Share $0.23 $0.25 $0.24
Revenue $154.58 million $158.73 million $143.27 million

Source: Financial Times

Sierra Wireless’s adjusted earnings per diluted share decreased 4.2% and its revenue increased 7.9% compared with the third quarter of fiscal 2014. Its slight decline in earnings per share can be attributed to its adjusted net income decreasing 3.4% to $7.42 million.

Its modest revenue growth can be attributed to increased sales in both of its business segments, including 5.1% growth to $130.65 million in its OEM Solutions segment, driven by growth in its automotive, energy, and networking sub-segments, and 26.3% growth to $23.93 million in its Enterprise Solutions segment, driven by its acquisitions of Maingate and Accel Networks.

Here’s a quick breakdown of six other notable statistics from the report compared with the year-ago period:

  1. Adjusted gross profit increased 4.2% to $49.16 million
  2. Adjusted gross margin contracted 110 basis points to 31.8%
  3. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 2.8% to $12.11 million
  4. Adjusted EBITDA margin contracted 40 basis points to 7.8%
  5. Adjusted earnings from operations increased 13.1% to $9.48 million
  6. Cash flows provided by operating activities decreased 63.8% to $10.44 million

Sierra Wireless also provided its outlook on the fourth quarter of fiscal 2015. It is calling for adjusted earnings per share in the range of $0.09-0.11 and revenue in the range of $148-151 million, but these estimates fell short of analysts’ expectations. Analysts had projected earnings per share of approximately $0.29 and revenue of approximately $165.23 million.

It is also worth noting that in the fourth quarter of fiscal 2014, the company reported adjusted earnings per share of $0.29 and revenue of $149.08 million.

Should you buy in to or avoid the sell-off?

It was a horrible quarter for Sierra Wireless, and its outlook on the fourth quarter made things even worse, so I think the sell-off in its stock is warranted.

I also think the stock could face continued weakness in the weeks and months ahead, because the company is clearly no longer the high-growth “Internet of Things” darling of the tech sector that it once was, so the market will have to decide how high of a multiple it is willing to pay for its earnings, which could take time.

With all of the information provided above in mind, I think Foolish investors should avoid investing in Sierra Wireless today and simply monitor it going forward.

Wait! Check out our TOP turnaround stock pick

When tech companies fall from grace like this Canadian icon did, it's typically impossible to regain relevance. Here at Motley Fool Canada, we think this company and its CEO are prepared to prove all of the doubters wrong. We have even named it one TOP turnaround stock for 2015. Will you be left on the outside looking in should our intuition come to fruition?

If you're a curious soul (like me), then you can download the name, ticker symbol, and price guidance absolutely FREE.

Simply click here to receive your Special FREE Report, "A Top Turnaround Stock Idea for 2015."

Fool contributor Joseph Solitro has no position in any stocks mentioned. David Gardner owns shares of Sierra Wireless. The Motley Fool owns shares of Sierra Wireless.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.