Is Carr’s Group plc a falling knife to catch after dropping 20% today?

Roland Head explains today’s profit warning from Carr’s Group plc (LON:CARR) and asks whether it’s too soon to buy.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of agricultural feed and engineering company Carr’s Group (LSE: CARR) fell by 20% this morning, after the firm warned that full-year profits will be “significantly below” expectations.

Should this be a surprise?

Today’s profit warning was blamed on two problems, neither of which was a complete surprise.

In January, Carr’s warned of a “significant contract delay in the UK manufacturing business”. The firm said it was cutting costs and looking for short-term work to offset the impact of this delay. Unfortunately this hasn’t been possible, mainly because of low order levels from the oil and gas market.

The second problem is with Carr’s agricultural feed business in the US. Again, the company warned in January that “volumes and margins are expected to remain under pressure”. In today’s update, we learn that “recovery in that market is now expected to be slower than anticipated”. This is expected to reduce profits in the short-medium term.

In both cases, these risks were clear in January, but the market gave management the benefit of the doubt. That may have been a mistake, but the question for investors today is whether they should buy, hold or sell Carr’s.

Is there worse to come?

Unfortunately, Carr’s management didn’t provide any specific guidance on profit today. My reading of “significantly below” suggests that earnings could be as much as 20% below expectations.

If that’s the case, then Carr’s could report earnings of 8.6p per share for the current year, putting the stock on a forecast P/E of 14.4 with a prospective yield of 3.2%. That’s an attractive valuation, especially as the current share price of 124p is backed by Carr’s book value of 120p per share.

The group’s engineering business could pick up rapidly if the oil and gas market recovery continues. The risk is that management have already been shown to be too optimistic once this year. There’s a real risk that another profit warning could follow.

Carr’s is going onto my watch list, but I’m going to wait for the firm’s interim accounts on 12 April so that I can review the situation in more detail.

What about rivals?

Carr’s mix of engineering and agricultural feed businesses exposes it to several different market sectors. This makes it hard to compare with other firms. But one way to view Carr’s might be as a much smaller version of FTSE 100 conglomerate Associated British Foods (LSE: ABF).

Like Carr’s, ABF stock has lost 20% of its value over the last twelve months. The group — which owns grocery, ingredient and sugar businesses, as well as budget fashion retailer Primark — has faced difficult market conditions. However, trading does seem to be improving.

Analysts expect ABF’s adjusted earnings to rise by 15% to 119.5p per share this year. The dividend is expected to rise by 11% to 40.9p per share. These figures put ABF stock on a forecast P/E of 22, with a prospective yield of 1.5%.

Although I do think that ABF is a good business, I’m not sure that it’s worth paying this much for the shares. I’d hold for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »