Should I Do It? Pike Electric Still Has Juice

Pike Electric(PEC Quote) sent shivers through investors Tuesday when it warned of an earnings shortfall. But does that mean investors should steer clear?

Pike said that it had break-even earnings in the fiscal third quarter (ended March 31), compared with the consensus analyst earnings estimate of 20 cents a share. The North Carolina-based independent power producer, which provides services to about 150 utilities in the eastern and southern U.S., warned that various rising expenses are offsetting 3%-4% price increases that were passed along to about two-thirds of its customers in the previous quarter.

The company's shortfall was purely on the expense line, as March-quarter revenue guidance of $154 million to $157 million was in line with previous expectations.

Even so, shares fell 15% on the session, closing Tuesday at $17.81. That's just 16 times the $1.11 a share that Pike Electric is expected to earn in fiscal 2006. Given that the company was hurt by issues like labor, fuel and insurance costs, factors that are affecting everyone in the industry, I'm here to answer investors' questions: Should I do it? Is this a good time to buy shares in Pike Electric? And, more importantly, can Pike's management team turn the business around?

The earnings warning is quite a departure for Pike, which exceeded consensus analyst estimates by 76% and 50%, respectively, during its first two quarters as a publicly traded company. Pike Electric had its IPO last June, selling 13.5 million shares at $14 each. The stock moved quickly out of the gates, with its April 7 all-time high of $21.80 a share, a full 56% ahead of the issue price.

While the company said it believes the higher cost pressures will prove temporary, management admitted these issues likely will not abate during the June quarter. In the meantime, Pike said it will try to secure further price increases from its customers.

Demand for the company's services should remain strong, too. Currently, about one-third of the country's utilities outsource business to companies like Pike. But according to Robert Baird analyst Michael Schneider, "This ratio is expected to significantly increase as cost-cutting spurred by industry deregulation leads many utilities to shrink their workforce despite the increasing need for infrastructure services."

Another wild card for the company is its storm restoration business.

To view David Peltier's video take on Pike Electric, please click here.