A Red Pill for PeopleSupport

PeopleSupport, Inc. (Public, NASDAQ:PSPT) shareholders are in a world of hurt today.  The stock dropped 28% Friday and continues to fall 5%+ after-hours following the ever-so-common disappointing 2008 guidance.  The Masters haven't talked up PSPT since it made its big run a year ago. But these days increasing your Q4 earnings three-fold amounts to nothing if you can't guide the Street to happiness.

The last three months has been brutal for PSPT:

PeopleSupport scored Q4 2008 revenue of $18.1 million, or 81 cents a share, versus $3.96 million, or 18 cents a share, a year earlier. PSPT's earnings more than tripled but their 2008 guidance killed the stock.  PeopleSupport is predicting earnings of 11 to 12 cents per share, with sales of $35 million to $36 million. Wall Street expected 17 cents per share on $40.9 million revenue. Game over PeopleSupport.

Forbes.com reported the company attributed the disappointing outlook to the U.S. weak economy. Big surprise there.  Caroline Rook, chief financial officer said:
"While we are excited about our future prospects, the economy is showing signs of weakness.  We are beginning to see this weakness in call volumes, and we are being cautious in our guidance." Rook specified that the slowdown was centered on its technology clients.

Enter the Downgrades, versus Enter the Matrix (great game by the way).  First up Piper Jaffray analyst Mark Marostica changed his rating to "neutral" from "buy" and cut his price target to $8.50 from $16. Marostica said the potential loss of $12 million or $13 million from Earthlink (ELNK) as that company restructures comes close on the heels of Vonage (VG)'s recent departure as a client, and could portend deeper long-term consequences.

RBC Capital Markets downgrade PeopleSupport Inc from "outperform" to "sector perform."

The most generous firm with comments on PSPT came today from Friedman Billings reiterating their "market perform" rating but dropping the target price from $18 to $11.

If only PeopleSupport could get Wall Street to take the Blue pill, not the Red pill.  Fellow Masters, stay clear of PSPT for now and we'll take another look in a few months.  If only I had taken the blue pill, ignorance is bliss.

Article written by Eric Cheshier

Co-Founder of theStockMasters.com

The Author has no positions in PSPT.

If you liked this article, Eric Cheshier also contributes to the Master Picks Newsletter and the Quant Method , only available at WallstNewsletters.com