In a possible warning sign of broader economic health, network infrastructure provider CommScope (NASDAQ:COMM) recently disclosed some downbeat preliminary results for its third-quarter earnings report. Specifically, management revealed demand loss due to low order rates. Subsequently, CommScope will take a hit on the bottom line, causing investors to exit out of COMM stock.
According to a press release, CommScope will likely post around $1.60 billion in net sales. Further, core net sales will come in at approximately $1.35 billion. In the year-ago quarter, CommScope rang up revenue of $2.38 billion. Thus, the blow to the company’s demand stands out sharply.
Management revealed that the aforementioned low order rates stemmed from customers “continuing to hold higher than required inventories.” An uncertain macroeconomic environment and “slower service provider network capital expenditure spending” also contributed to the fallout.
More worrisome, CommScope also disclosed that its Q3 net loss will land at roughly $829 million. This includes “non-cash asset impairments related to the Home and ANS segments of approximately $895 million,” per the press release.
Due to the lower-than-expected Q3 results, CommScope revised its full-year adjusted EBIDTA guidance down to a range between $1 billion and $1.05 billion.
Pain in COMM Stock Has Broader Implications
While executives often attempt to frame discussions in the most productive light possible, it seemed difficult for management to find the silver lining in CommScope’s results. “The weaker macroeconomic backdrop and customer inventory digestion continues to negatively impact revenues, resulting in the Company lowering our prior adjusted EBITDA guideposts,” said Chuck Treadway, President and CEO of CommScope.
Even worse, Treadway noted that the softer demand environment “will continue as we move into the first half of 2024, impacting both revenue and profitability.” That was probably the clear signal that sent investors rushing out the door today. As of this writing, COMM stock is down by around 40%.
To be fair, Treadway also expressed some encouragement in that the company improved efficiencies and implemented cost actions. Thus, when the broader demand profile improves, CommScope will be better positioned to recover.
Interestingly, options traders appear to earnestly believe in the discounted opportunity in COMM stock. Conspicuously, Fintel’s options flow screener — which exclusively targets big block trades likely made by institutions — shows significant volume of bought calls on Monday.
Still, the major concern centers on enterprise-level information technology () spending. Late last year, many companies scrutinized their IT budgets. Further, other companies began cutting costs in that arena or sought cost efficiencies. Evidently, these efforts appear to be hurting CommScope’s business.
Why It Matters
According to TipRanks, analysts peg COMM stock as a consensus moderate buy. However, the average price target — standing at $7 — now represents a nearly 400% increase from current levels. Based on today’s preliminary Q3 disclosure, investors should take this assessment with a grain of salt.
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On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.