Shares of EarthLink Holdings Corp Pop on Raised Guidance; Growth Remains Elusive

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of EarthLink Holdings Corp rose as much as 14% on Tuesday after the managed network and cloud services company announced first-quarter results that beat Wall Street expectations on revenues and earnings per share and raised guidance for the full year.

So what: Here's how the headline numbers shook out:

*Adjusted Source: Thomson Financial Network, Zacks Investment Research, EarthLink Holdings Corp.

Revenues did come in 4% above the consensus estimate. Nevertheless, that still represented a 5% year-on-year decline, with Business Services (the company's largest segment) registering a 3% drop. According to the company, this was due to "shifting focus away from low-margin revenue streams." Here's hoping! (Actually, that's a little unfair since there is some evidence of that shift. Business gross margin improved by more than three percentage points relative to the year-ago quarter to 54.2%.) Still, it would be nice to see a return to growth the company has not experienced year-on-year growth in quarterly revenues in three years.

Meanwhile, despite a loss on a GAAP (generally accepted accounting principles) basis, the company continues to generate positive cash flows ($44 million in unlevered free cash flow in Q1). Indeed, depreciation and amortization, a non-cash charge, significantly exceeds capital expenditures. The company (wisely) used $26 million of that cash to reduce its leverage by repurchasing debt paying an 8.875% coupon.

Now what: At 3.5 times free cash flow (per research firm Morningstar), EarthLink Holdings' shares look very cheap. Part of the explanation for the depressed multiple is the lack of growth; as such, the stock is what I would consider a special operation. Such operations can be very interesting and profitable, but I would suggest the overwhelming majority of individual investors avoid them. They require a lot of due diligence, a sound knowledge of valuation, and constant, careful supervision. In other words, they are a poor investment on the basis of investors' time. There are easier opportunities to earn an honest return.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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