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Essentra plc slumps 20% on profit warning

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Essentra (LSE: ESNT), the maker and distributor of vital component parts, has reported a challenging update that has sent its shares plummeting. Clearly, this is hugely disappointing for the company’s investors, although parts of the business continue to perform well. Therefore, could it be the right time to buy Essentra, or is it best to avoid it?

Trading in its Component Solutions division has been in line with expectations for the 2016 financial year. Growth in Continental Europe and Asia has remained strong, with recently-implemented initiatives in the UK and US delivering early signs of slowing the sales declines that were a feature of H1.

However, the Pipe Protection Technologies segment has experienced a tough year. Although the Extrusion business has benefitted from new contract wins and a greater focus on higher value-added technical profiles in attractive growth sectors, trading remains subdued overall.

Similarly, the Health & Personal Care Packaging division has experienced a disappointing year. Despite the three facilities in the US and UK that previously experienced integration issues having performed at improved levels in the second half of the year, it has been below expectations.

In addition, the company’s Filtration Products division has failed to win new contracts at the rate that was previously anticipated. Its performance in 2016 is now expected to be below previous expectations. In fact, the outlook for 2016 is now for a like-for-like (LFL) revenue decline in line with the first half out-turn of 7%. This compares with previous guidance of a mid-single digit decrease, with adjusted operating profit now expected to be in the range of £137m to £142m, versus previous guidance of £155m to £165m.

Tough times in the sector

Clearly, Essentra is enduring a difficult period and it would be unsurprising for its shares to fall further. There’s also the potential for further downgrades as its divisions may experience further weakness in their operating environments.

Of course, Essentra isn’t the only support services company that has seen a profit warning and share price fall this year. Sector peer Capita (LSE: CPI) has fallen by 40% since its profit warning in September, with the company’s shares now having a price-to-earnings (P/E) ratio of only 8.7. This indicates that there’s significant upward rerating potential on offer, especially since Capita is forecast to return to growth next year. Its bottom line is expected to rise by 3%, which shows that it may prove to be an excellent opportunity to buy ahead of a turnaround.

However, with Essentra’s outlook being relatively downbeat and highly uncertain, it may be prudent to await evidence of an improved performance before buying in. The company’s P/E ratio of 8.3 has appeal, but could move lower if the trend of 2016 continues into 2017. As such, Capita seems to be the better buy of the two support services companies for now.

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