Why Party City Shareholders Are Celebrating

What happened

Shareholders of Party City (NYSE: PRTY) stock are partying like it's 1999 (so to speak) on Thursday, after the costumes and party supplies retailer reported Q3 2017 earnings that met Wall Street's expectations for the quarter -- sort of.

Party City reported pro forma earnings of $0.13 per share for its fiscal Q3, in line with analyst estimates. The company only reported $560.1 million in revenue, however, versus the Street's expectation of $587.5 million. Yet the stock is up 19.9% as of 2:45 p.m. EST.

So what

More often than not, you'd expect market commentators to call results like these a "mixed" quarter, in which revenues were missed, and profits just barely met. So why are investors so happy with the results?

That's actually a very good question. Fact is, while Party City's pro forma earnings met the Wall Street consensus, the company's GAAP number fell far short, with Party City reporting actual net income of only $0.08 per share, diluted. Furthermore, management's guidance for the rest of this year was nothing to celebrate. Party City said it expects to close out 2017 with revenues of only $2.36 billion to $2.39 billion (both numbers short of Wall Street's projected $2.4 billion). Pro forma profits for the quarter are expected to range between $1.21 per share and $1.25 per share, versus Wall Street's hoped-for $1.28 per share.

GAAP profits will probably fall even further short -- only $1 to $1.04 per share.

Now what

When you get right down to it, Party City reported "meh" results for last quarter, and weak guidance for the rest of the year -- neither of which seems like much cause for celebration. And yet, Party City stock is up -- way up -- on Thursday. Why is that?

My best guess at this point is that, despite the disappointing results relative to guidance, investors are looking at Party City stock and seeing that it costs only $12. The stock is expected to earn $1 or more before the year is over, and those investors are thinking to themselves, "Hey, 12 times earnings? That's not a half bad price."

Which still leaves the big question: Why didn't they think the same thing on Wednesday, when Party City stock was $2 cheaper?

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.