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

Sierra Wireless Inc. (TSX:SW)(NASDAQ:SWIR) released third-quarter earnings on November 5, and its stock has reacted by falling over 20%. What should you do now?

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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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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.

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