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Is Devro plc’s profit warning plunge a buying opportunity?

Image: The Motley Fool Editorial.

Shares in sausage-skin maker Devro (LSE: DVO) plunged today after the company issued a shock profit warning. At one point shares in the firm, which have already lost just under a quarter of their value this year, were trading down by as much as 25% after the company warned that it expects sales volumes next year to be about 10% lower than previously thought. 

Management is blaming the expected volume decline on its three-year factory upgrade plan. The company said in August that Latin America was “most significantly impacted” by the programme, which began in 2014. Unfortunately, other regions have failed to offset Latin America’s sales slide. Management also said today that sales volumes in Russia and South East Asia had improved since July but total volume was little changed from the first half of 2016.

For 2016, Devro expects underlying operating profit to remain unchanged as the adverse impact on margins will be offset by further benefits from lower input costs and foreign exchange. Nonetheless, reported profit will take a hit as the group is predicting £3m of exceptional items in the fourth quarter of 2016. 

Based on Devro’s guidance, City analysts have slashed their 2017 earnings forecasts for the company by 20%. Before today’s warning, analysts were calling for earnings per share of 14.2p for 2016 and 18p for 2017 but now it looks as if the company’s earnings will decline during the next two years. 

Time to buy?

After Devro’s slump today, the company might look attractive to bargain hunters but I would stay away. You see, Devro has been over-promising and under-delivering for years, and it seems as if the market is finally losing patience with the firm. 

It has issued at least four profit warnings since the beginning of 2014. They say profit warnings usually come in threes but Devro is clearly the exception to this trend.

Furthermore, it looks as if its business is in decline. Revenues have been shrinking since 2013 and pre-tax profit has dropped by an average of 20% per year since 2011. It now looks as if this trend is going to continue for the next two years, and considering the company’s past history, I wouldn’t rule out further problems down the road. 

Having said all of the above, Devro’s chief executive Peter Page seems to believe that the company’s shares are attractive at current prices. It appears that Mr Page made use of today’s declines and spent £15,000 acquiring 8,300 shares in his company at a price of £1.80. 

Foolish summary 

So all in all, I don’t think that investors should follow Mr Page and take advantage of Devro’s declines today to build a position. The company appears to have lost its direction and based on past trends, there are likely to be more profit warnings in the years ahead. If you’re looking for post-profit warning bargains, there are plenty of other opportunities out there with a brighter outlook. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Devro. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.