Quiksilver Catches a Wave of Selling

Investos soured on the sporting apparel company after a lower-than-expected fourth quarter forecast

Shares of sporting apparel outfit Quiksilver (ZQK) fell out of fashion on Wall Street Sept. 8, shedding 1.31 to 12.33. The company, whose brands include surfing-gear mainstay Quiksilver and ski-equipment icon Rossignol, posted a sharp drop in fiscal third-quarter EPS, to 4 cents from 20 cents one year earlier.

The company chalked it up to an expected negative impact from its seasonal Rossignol business and stock option expense, which offset a 41% sales rise. Worse, Quiksilver cut its fourth quarter guidance.

Reaction on Wall Street was mixed. Morgan Keegan analyst Brad Stephens downgraded his rating on the shares to market perform from outperform on Sept. 8, saying in a report that although the company is making progress on integrating the Rossignol unit, he's "hard pressed" to argue for a higher near-term multiple for the stock given the lowered guidance. Stephens adds that higher interest expense is now expected to a cause 9 to 13 cent shortfall in fiscal 2007 (ending October) EPS.

Stephens rattled off a list of negative factors for the stock, saying it "isn't that cheap", and that its high amount of leverage and lack of free cash flow is likely to scare off value investors, while "minimal top-line potential" from the hardgoods (i.e., sports gear) portion of its business is likely to keep growth-oriented investors on the sidelines.He cut his 77-cent fiscal 2006 EPS estimate to 74 cents and his 98-cent forecast for fiscal 2007 to 90 cents.

Standard & Poor's analyst Marie Driscoll was not quite as bearish. She reiterated her strong buy recommendation on the shares on Sept. 8. She also reduced her fiscal 2006 and 2007 estimates -- to 73 cents and 95 cents, from 80 cents and $1.10, respectively, and cut her 12-month target price to $15, from $17. But Driscoll continues to view the company as "the best play in sports apparel" and says it holds a "significant opportunity for organic growth and margin expansion."

Given the mixed outlook, investors may understandably be hesitant about hopping on board.

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