In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.
In my day job, analyzing equities for Schaeffer's Investment Research, I'm always focused on one metric: expectations. They're not always easy to quantify, but investors' and analysts' expectations for a stock more often than not tend to drive its performance. For example, widespread skepticism makes it that much easier for a company's stock to bounce in the event of a positive development. And, on the other side of the coin, we have Unisys Corporation (NYSE: UIS) as a cautionary tale.
What went wrong? At number 7 on our list of SPX losers, UIS lost 86% of its value during the 10-year period that ended June 30, 2008. The shares peaked at $49.69 in September 1999, narrowly exceeding their previous high in October 1987. Shortly after tapping this all-time peak, Unisys would learn a harsh lesson about the danger of high hopes.
In the company's third-quarter earnings report, which hit the Street in October 1999, UIS admitted that revenue grew by just 4%, falling well short of analysts' expectations for an increase of 11% to 12%. Disappointed investors sent the shares plunging 37% over the course of one session, a sharp sell-off that surprised more than a few stock-market veterans. But, as Merrill Lynch analyst Steven Milunovich explained to The New York Times, "This company, under Larry Weinbach, has done nothing but meet and beat expectations. So when they disappoint, it makes it that much worse."
However, the sales miss also highlighted a fundamental challenge facing Unisys. The company was formed in 1986 through the merger of two mainframe computer makers, and the technological landscape had changed drastically. To survive, UIS had to adapt - and not only adapt, but outperform younger and fresher competition.
By October 2000, the company logged three consecutive quarters of profit misses, and announced that it would trim its workforce in an attempt to cut costs. Unfortunately, the fundamental picture hadn't changed. Following several years of losses and layoffs, CEO Weinbach announced his departure in April 2004.
When the chief left, he failed to take the company's bad fortunes with him. UIS continued to report quarterly losses and warn of disappointing revenue in the years that followed. However, the stock never again reacted quite as dramatically as it did to that October '99 miss. It would seem that nothing much changed ... except for investors' expectations.
What next? The pattern of lackluster earnings continues. According to First Call, UIS has missed analysts' consensus estimates during each of the four previous reporting periods. The share price reflects the company's underperformance; since November 2007, UIS has wandered between $3.20 and $5.20.
However, it would seem that not everyone on the Street has learned a valuable lesson. Zacks reports that two stubborn analysts still maintain a "strong buy" rating on the underperforming equity, leaving the door open for this lingering optimism to unwind against the shares.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
7-31-2008 @ 7:49AM
Dan Barnett said...
I've been following the entire series but have yet to see the monumental "flame-outs" which have gone completely bust, like Enron (perhaps #1 on the list?), Worldcom, American Home Mortgage, & now IndyMac Bank.
All the companies so far still exist. Completely bust still beats, "Not Dead Yet"
7-31-2008 @ 11:46AM
Jo said...
Having worked for Unisys, it is no wonder why they consistently perform poorly. The management team is very incompetent and have way to much fat management in the good old buddy network. when i worked for a competing job, I was 3 levels from the Chairman, at Unisys i was 8. They other 5 levels, add 18 to 20% excessive cost with no value added, they muddled situations, created barriers and were risk adverse inspite of the fact, they didn't accept risk mitigation.
I saw the executive office do drive by decision making, usually wrong, every time a good deal came to them.. and accept bad deals.
Fire Joe and top management that have been there more than 10 years. If you never worked anywhere else, how can you drive a new business model when you have never have experience increasing reviews?