Small Cap Watch List (Track at Marketocracy) member NutriSystem, Inc. (NTRI) announced results for the second quarter ended June 30, 2007:

— An increase in revenue of 61% to $213,556,000 in the second quarter of 2007 compared to $132,631,000 in revenue in the second quarter of 2006;

– Growth in operating income to $52,729,000 (24.7% of revenues) in the second quarter of 2007 compared to $31,030,000 (23.4% of revenues) in the second quarter of 2006; and

– An increase in diluted earnings per share of 81% to $0.96 in the second quarter of 2007 compared to $0.53 per diluted share in the second quarter of 2006.

The consensus among Wall Street’s finest was that the company would earn $0.85 on $194 million in sales, so at first blush it is hard to see why the stock plummeted in after hours trading. Scrolling a little further down the press release we see the likely explanation:

For the third quarter of 2007, the Company estimates that revenue will be between $200 and $208 million, and expects diluted earnings per share to be between $0.77 and $0.82.

The consensus for next quarter was $0.89 on $209 million in sales. So basically the company is saying it will give back $0.07 - $0.12 of the $0.14 upside they had in the second quarter.

The Company is raising its full year 2007 guidance and now expects revenue to be between $810 million and $820 million and 2007 diluted earnings per share to be between $3.46 and $3.52 per share.

The previous estimates were $3.43 on $800 million. So the $20 million upside to Q2 revenue is offset by approximately $5 million in downside to the rest of the year, while $0.05 - $0.11 of the $0.14 earnings per share upside is expected to be given back during the remainder of the year. Hardly justification for a 20% drop in value in two days.

If you ask me, the investors in Nutri System are like binge dieters, and the weight of the stock (in their portfolios) goes up and down like a yo-yo. I look at the chart and see this isn’t the first big and sudden drop. I look at the fundamentals and think it could probably be as temporary as the others.

Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Laboratory Corporation of America(R) Holdings (LH) announced results for the quarter and six months ended June 30, 2007. Excluding restructuring and other special charges recorded in 2007, net earnings increased 14.1% to $132.8 million. Earnings per diluted share (EPS) increased 20.7% to $1.05, compared to $0.87 per diluted share in the second quarter of 2006. Excluding restructuring and other special charges recorded in 2007, EPS increased 25.3% to $1.09, in line with consensus estimates.

Revenues for the quarter were $1,043.1 million, an increase of 15.4% compared to the same period in 2006 and ahead of the $1.03 billion consensus. Looking ahead, the Company expects revenue growth of 13% to 14%, EBITDA margins of approximately 26.4% to 26.9%, and diluted earnings per share of between $4.11 and $4.27. With the consensus at 13.5% revenue growth and $4.21 in earnings per share, the apparent margin pressure (relative to expectations) is forecast to continue.

Mid Cap Watch List (Track at Marketocracy) member Steel Dynamics, Inc. (STLD - Annual Report) announced second quarter earnings of $94 million, or $0.95 per diluted share, an increase of 7 percent when compared to $0.89 per diluted share in the second quarter of 2006 but below consensus estimates of $1.05. Diluted earnings per share decreased 6 percent from the first quarter of 2007, principally due to bond refinancing costs. Revenues increased to $911 million, 11 percent higher than the year-ago quarter and 5 percent higher than the first quarter of 2007, but below the consensus estimate of $948 million. Adjusting for the refinancing charge the earnings were $1.01, at the low end of the lowered guidance range the company provided in May. Guidance for the third quarter, however, was strong:

We expect market demand for flat-rolled steel to improve in the third quarter, following several months of inventory liquidation, which would provide the possibility of a higher third-quarter volume of shipments and
improved profit margins for sheet products. Combined with continued strong results for long products, we expect higher third-quarter earnings in the range of $1.10 to $1.15 per diluted share, subject to certain purchase accounting adjustments related to our acquisition of The Techs.

Consensus estimates for next quarter were $1.08, so the company now expects to make up for this quarter’s shortfall in the coming one. Given their forecasting success to date, we wouldn’t be surprised if investors say “show me the money.” Particularly since the company claims its customers have been liquidating inventory but the company itself has seen inventories balloon, which resulted in negative cash flow from operations for the quarter.

Small Cap Watch List (Track at Marketocracy) and Mid Cap Watch List (Track at Marketocracy) member Hexcel Corporation (HXL) reported results for the second quarter of 2007. Net sales from continuing operations in the quarter were $289.8 million, 5.8% higher than the $274.0 million reported for the second quarter of 2006 but below the consensus estimate of $296 million. Net income from continuing operations for the second quarter of 2007 was $17.5 million, or $0.18 per diluted share, slightly ahead of consensus. Net loss from discontinued operations was $8.7 million, or $0.09 per diluted share including an after-tax charge of $9.7 million for previously disclosed legal matters. According to the company:

The second quarter saw a continuation of the first quarter sales pattern for the commercial aerospace market. Because of the A380 delay, Airbus sales were again down significantly from a year ago, but strong demand from all other major customers resulted in the almost 9% overall growth in our commercial aerospace sales. Start-up, training and qualification efforts combined with some unplanned maintenance outages put some pressure on our margins but we still met our guidance targets and expect better year-on-year margin expansion for the remainder of 2007.

The ramp up of new B787 and A380 programs layered on top of increasing aircraft build rates should provide opportunity for good volume leverage next year. Longer term we are encouraged by the continued strength in wind turbine and aircraft orders, especially the new composite intensive A350 XWB.

I’ve commented at length about the A380 problems  and I’ve also noted the extraordinary pricing power enjoyed by turbine makers. If the company could start hitting on all cylinders it might be a strong performer. As it is, the company raised sales guidance to the high end of prior levels.

Featured at the Festival of Stocks.

Large Cap Watch List (Track at Marketocracy) member American Standard Companies Inc. (ASD) announced that it has signed a definitive agreement to sell the company’s worldwide Bath and Kitchen products business to funds advised by Bain Capital Partners, LLC, a leading global private investment firm, for $1.755 billion in cash. Upon completion of the sale, Bain Capital will acquire all of American Standard’s Bath and Kitchen business with 2006 annual sales of $2.4 billion, 26,000 employees and 54 production facilities in 23 countries worldwide. American Standard will then change its name to Trane. Trane is the flagship brand of its global Air
Conditioning Systems and Services business, which last year generated sales of $6.8 billion.

At 0.73x sales, American Standard is selling the bath and kitchen division for a multiple lower than the company’s own 1.03x. However, the lower valuation appears more than justified, because according to the company’s annual report the division had lower asset turnover and lower profitability. Many investors are excited about the prospect of the company’s strongest division trading on a stand-alone basis.

Small Cap Watch List (Track at Marketocracy) member Pre-Paid Legal Services, Inc. (PPD), announced financial results for the second quarter ended June 30, 2007. Membership revenues increased 4% to $106.9 million from $103.1 million for the same period last year. Net income increased 9% to $13.2 million from $12.1 million for the previous year. Diluted earnings per share for the quarter increased 22% to 99 cents per share from 81 cents per share for the prior year’s comparable quarter, higher than the net income increase, due to an 11% decrease in the weighted average number of outstanding shares. According to Yahoo! Finance, there were no Wall Street estimates with which to compare the number.

From an earnings quality standpoint, cash flow from operations grew at a slightly faster rate than net income, which is generally a good sign. Much of the cash flow was returned to shareholders through the buyback plan, but the selling shareholders probably shouldn’t have, as the average transaction price was below $49 and well below the current $68.50 share price. It seems the company can at least spot a good buying opportunity in its own shares.

The press release did not include a balance sheet or detailed cash flow statement, so a more thorough analysis will have to wait for the 10Q.

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

• Altera (ALTR) - Xilinx (XLNX)  filed an awful report. Can Altera do any better? Consensus is $0.19 EPS on sales of $314 million.
• Hexcel (HXL) - This Small Cap Watch List (Track at Marketocracy) member was seeing rising estimates until last month, when they were cut from $0.20 to the current $0.17.
• Steel Dynamics (STLD - Annual Report) - The Mid Cap Watch List (Track at Marketocracy) member is expected to earn $1.04 on sales of $948 million.
• Texas Instruments (TXN - Annual Report) - expected to earn $0.42 on $3.45 billion in sales.

Tuesday

• CH Robinson (CHRW - Annual Report) - estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
• CDW Corporation (CDWC) - stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
• EMC Corporation (EMC - Annual Report) - The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
• Laboratory Corporation of America (LH) - The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
• Lexmark (LXK) preannounced and will probably offer poor guidance.
• Linear Technology (LLTC) - expected to earn $0.35 on $267 million in sales.
• Norsk Hydro (NHY) - The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
• Plantronics (PLT) - my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
• United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

• Arkansas Best (ABFS) - after Landstar’s (LSTR - Annual Report) weak quarter I’m expecting a poor showing. Estimates have come down to $0.67, but may not have come down enough.
• Colgate Palmolive (CL) - Large Cap Watch List (Track at Marketocracy) member unlikely to surprise much. Consensus is $0.83 on $3.31 billion.
• Corning (GLW - Annual Report) - is LCD supply/demand back in balance?
• Freeport McMoRan Copper & Gold (FCX - Annual Report) -Another Large Cap Watch List (Track at Marketocracy) member with dramatic positive earnings revisions, now standing at $2.71.
• Graco (GGG) is another Large Cap Watch List (Track at Marketocracy) member. Estimates have been coming down and are now at $0.61.
• MEMC Electronic Materials (WFR) - Is polysilicon supply catching up to demand for this Large Cap Watch List (Track at Marketocracy) member?
• Xerox (XRX) - can they make the numbers without asking investors to ignore a bunch of stuff? I don’t doubt they will earn $0.27 as expected but wonder how they’ll get there.

Thursday

• Federated Investors (FII) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.54.
• Ingram Micro (IM) is on the Small Cap Watch List (Track at Marketocracy) and expected to earn $0.36.
• KLA-Tencor (KLAC) - I know the semiconductor equipment fundamentals stink. I want to know how much and whether it is priced in.
• NII Holdings (NIHD) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.49.
• Western Digital (WDC) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.36.

Disclosure: William Trent has a long position in SMH.

My watch lists did not perform as well as the benchmarks this week. The Small Cap Watch List (Track at Marketocracy) lost 2.54%, compared with losses of 2.25% for the Russell 2000 and 1.59% for the S&P Small Cap 600.

The Mid Cap Watch List (Track at Marketocracy) lost 1.96%, compared with 1.32% for the S&P Midcap 400.

The Large Cap Watch List (Track at Marketocracy) lost 1.43% while the S&P 500 lost just 1.19%. At least it is still doing better since inception.

The economic data last week continued the prior trend - mixed with a skew to the weak side.

EconomicData

The Watch Lists generally performed in line with their respective benchmarks this week.

The Small Cap Watch List (Track at Marketocracy) gained 0.5%, compared with gains of 0.4% for the Russell 2000 and 1.05% for the S&P 600.

The Mid Cap Watch List (Track at Marketocracy) gained 0.88%, slightly worse than the 1.09% gain for the S&P 400.

The Large Cap Watch List (Track at Marketocracy) gained 1.39%, more or less in line with the S&P 500’s 1.44%.

With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.

Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:

I will continue to track both lists on StockPickr.