dropped sharply Friday after a investment bank analyst's calls to customers suggested bad news was on the electronic auctioneer's horizon.
Shares of Pittsburgh-based FreeMarkets were trading roughly flat in the morning around $13. Then just after noon, shares plummeted, dropping to as low as $9.71 before closing at $11.19, down $1.99, or 15.1%, on trading more than five times the average volume. Shares rose slightly to $11.21 in after-hours trading.
The fall was apparently spurred by telephone calls from Fechtor Detwiler and Co. managing director Paul Rodriguez to clients about FreeMarkets' outlook, according to two sources. One New York hedge fund manager said Rodriguez told him that someone he knew heard from a FreeMarkets salesperson that the company was having trouble signing up new customers, that existing customers were decreasing usage and that FreeMarkets would bring down its forecast by 40%.
But the hedge fund manager said Rodriguez could not tell him over what period the 40% decline applies to.
"I was, in fact, surprised they went out with it," said the fund manager, who called the information "flimsy." The fund manager does not own shares of FreeMarkets.
Reached by phone, Rodriguez declined to comment. FreeMarkets spokeswoman Karen Kovatch said she can't comment on market rumors.
Wedbush Morgan Securities analyst Nathan Schneiderman said his clients reported that Rodriguez told them that FreeMarkets would lower guidance by 40% for the second half of the year and said FreeMarkets will not make its numbers for the current quarter. Schneiderman, who has a buy rating on FreeMarkets and includes the list on his focus list, said he spoke with FreeMarkets CFO Joan Hooper and concluded Fechtor's claims "are absurd." Schneiderman's firm hasn't done any banking with FreeMarkets.
Schneiderman said a client also reported that in a follow-up call, Rodriguez backpedaled and said FreeMarkets will have three to four customers.
In April, FreeMarkets reaffirmed full-year 2002 guidance for revenue reaching $205 million and pro forma earnings of 25 cents a share, which was the high-end of a previous range. The company's estimates for the second quarter put earnings at 5 cents to 7 cents a share on $47 million in revenue.
The Wall Street consensus gathered by Thomson Financial/First Call pegged earnings at 6 cents a share for the second quarter and 27 cents a share for the full year and revenue at $47.7 million for the second quarter and $207.6 million for the full year.
FreeMarkets, in fact, has had trouble attracting customers. In the first quarter, the company said its total number of customers remained flat from the previous quarter, at 125.
"This is the show-me quarter," when FreeMarkets must show an increase in customers, Schneiderman said of the current quarter. Schneiderman is looking for FreeMarkets to announce that it has nabbed three to five more customers in the second quarter. In a recent note, Schneiderman acknowledged that FreeMarkets remains a "controversial story" but said he believes there is little risk of the company missing the quarter.