September 2004  Email this  Print this
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INVESTING
Skid Marks on My Heart
by Andrew Feinberg If you purchase shares of JLG Industries, be forewarned: You could be in for a profitable but bruising experience. I've owned JLG three times, and I've made decent money overall, but the wounds take time to heal. Nonetheless, researching this column has convinced me to again buy the stock, which I recently sold in exasperation. Why go back? Because JLG is, by all accounts, the well-managed leader in a good niche business. It makes aerial work platforms (AWPs), telehandlers and excavators. The market for AWPs, which JLG invented, is growing. Not only do they often replace scaffolding, but some warehouse stores now use AWPs to stack goods on high shelves. "The company's business has just entered an up cycle that could last until 2006 or even 2007," says Preston Athey, manager of T. Rowe Price Small-Cap Value fund. "This could easily be a $25 stock." It recently traded at $14.
Tight-lipped
So what's the problem? Well, JLG has a nasty habit of missing earnings estimates and not disclosing items that a shareholder might want to know. During the 2000-03 decline in construction spending, JLG seemed to miss analysts' earnings estimates almost as often as it made them. I owned the stock for part of that period and dreaded earnings announcements. As JLG missed a 10-cent estimate by, say, 8 cents, I'd watch the stock tank apocalyptically.
Infuriated, I would sell. Then the company's powerful position in an industry that had to recover someday would lure me back. What I thought was the last straw occurred on May 20, when JLG reported earnings of 20 cents a share, 10 cents below the Thomson First Call estimate. About half of this miss resulted from much higher costs for JLG's incentive-payment plan than analysts expected. The company could have told the world in advance that these costs would be a killer. But it didn't. So I am burned again. Sayonara, JLG.
Then I rethink the decision to sell. JLG stopped giving earnings guidance during the interminable construction recession, Jim Woodward, the company's chief financial officer, reminds me when I call. "We decided we could not call the bottom, so we stopped issuing guidance," he says. Then he adds: "We have no comment on analysts' estimates."
Can't the CFO give investors a little heads-up on bad news? After all, he knew the earnings estimates were far too high. "I struggle with this," he says. "Yes, we could have given specific guidance about incentive pay, but then where does it stop? There will always be something we didn't expect or analysts didn't expect."
I point out that the stock rose as high as $16 in late April before plunging to $13 in the wake of the disappointing earnings. Didn't the company do a disservice to investors who paid those inflated prices thinking that the company wasn't going to surprise Wall Street yet again? Woodward is unmoved. "Ultimately, one quarter isn't going to make a difference," he says. And he all but promises future unwanted surprises: "Because we're in a cyclical industry, our internal forecasts are that much more variable."
Be a contrarian
In fact, Preston Athey suggests that I learn to love rather than loathe JLG's earnings shortfalls. "If you think logically, like a long-term investor," he says, "then over a long period of time the stock will go to the level it ought to. Without guidance, it tends to be a choppier ride. A long-term investor is better off in a world of volatile prices if he can take advantage of the passions of the moment." Athey obliquely suggests that he might have been buying those shares I unwisely dumped in May.
So, by all means, buy the stock. But when JLG announces earnings, be sure you're wearing a hard hat. Then, as the stock plunges, smile and think long-term thoughts.
Columnist and New Yorker Andrew Feinberg writes about the choices, challenges and frustrations facing individual investors. | 
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