Gigamon (GIMO) Lowers Revenue Outlook, Shares Plunge 32%

by Ryan Fitzwater, Director of Research, The Oxford Club

Shares of Gigamon (NYSE: GIMO) are plummeting today after the company cut its revenue outlook for the second quarter.

Yesterday, the networking-hardware provider announced preliminary results for its second quarter. It expects to earn $34.5 million to $35 million for the quarter, well below the previously stated guidance of $38 million to $42 million.

The official release date for Gigamon’s second quarter is July 24, but shares are already reacting to the bad news and are down over 32%.

Gigamon’s CEO, Paul Hooper, gave his explanation for lower-than-expected sales, stating, “We experienced challenges with closing the deals in our pipeline during the later stages of the quarter, as we continued to see longer review and approval cycles."

Whatever the excuses are for lower guidance, shares opened today at $12.49, their lowest price ever after going public in June of last year.

The contrarian investors out there might look at today’s massive price drop as an excellent opportunity to pick up shares at bargain prices. But before you jump headfirst into a falling stock, you should see how the company stacks up on fundamentals.

Sounds like a perfect time to check out how Gigamon performs on our Investment U Fundamental Factor Test:

Earnings-per-Share (EPS) Growth:  In the first quarter of 2014, Gigamon saw earnings drop 23.81%. This is not what we like to see.

Price-to-Earnings (P/E): When a company reports a loss on earnings (aka net income) you cannot valuate a trailing P/E (what it earned over the last 12 months vs. its current share price). If that’s the case, you can look at a company’s forward P/E (what it expects to earn over the next 12 months vs. its current share price). Gigamon is in this boat, currently clocking in with negative earnings. The good news is that the company expects to start turning a profit over the next three years. The bad news is that even with today’s lower price, the forward P/E is 64.94, well above the industry average of 27.82.

Debt-to-Equity For debt-to-equity, we finally see some light at the end of the tunnel. Gigamon has no debt on its balance sheet and holds $142.67 million in cash. It has a debt-to-equity ratio of 0%; the industry average is 28.35%. A positive sign, but now we have to see if cash is growing or shrinking.

 Free Cash Flow per Share Growth : In its most recent quarter, Gigamon saw a $500,000 decrease in FCF. Not taking the prize home on this metric either.

Profit Margins Gigamon’s peers are sporting profits margins of -2.66%. But even with negative margins as the industry standard, Gigamon is still trailing the competition with profit margins clocking in at -25.88%.

Return on Equity As you know, Gigamon has negative earnings. And while the industry average ROE of 0.25% is laughable, Gigamon once again whiffs with a -24.47% ROE.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

F: Sell (One key metric or less)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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