Is Gattaca plc a falling knife to catch after dropping 10% today?

Will Gattaca plc (LON: GATC) serve investors well from here or is this alternative better?

| 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.

Today’s update from engineering and technology industries recruitment services provider Gattaca (LSE: GATC) has spooked the market and the shares are down 11% as I write.

Does that mean the new share price offers better value for investors or is the drop a warning sign that we should keep away?

Rising costs and delayed savings

The negative in the update is that the directors expect full-year profits for the year to 31 July to be 10%-15% below its prior expectations. There was no mention of missing expectations in the firm’s trading update for the six months to 31 January, which Gattaca delivered on 2 February, so I’m assuming that trouble emerged since then, suggesting a rapid deterioration, or maybe a sudden ‘realisation’.

The directors say that tougher UK trading conditions affected first-half performance after the Brexit vote, driven by “near-term uncertainty which led to elongated hiring decisions and some projects being delayed.”  However, that was known back in February. The new information is that costs have ballooned as the firm invests for growth and administration cost savings that were expected have been “delayed”.

The directors remain optimistic about the medium-term outlook, saying there are “some signs of a return of confidence in recent weeks.”

What kind of beast is Gattaca?

Recruitment firms are cyclical, and Gattaca’s shares are down about 57% from a peak of around 632p achieved during April 2014. Meanwhile, the price-to-earnings (P/E) ratio runs just over a low-looking seven or so.

When cyclical firms have low P/E ratings after a period of buoyant macroeconomic activity, it can often serve as a warning to investors that difficult trading could be on the way. I consider the shares to be dangerous right now, so I’m avoiding, rather than fighting the trend by buying.

Meanwhile, high technology tools and systems provider Oxford Instruments’ (LSE: OXIG) update today suggests the firm could be a better buy than Gattaca.

Growth expected

The company reckons its full-year results to 31 March will come in flat, so no earnings growth compared to the year before, but no decline either. The outcome conceals a varied result from operations with strong performance from the NanoTechnology Tools division offsetting a deterioration in OI Healthcare.

City analysts following the firm expect earnings to advance 14% for the year to March 2018 and 5% the following year. The expectation of growth is on the table and Oxford Instruments occupies a specialist niche in the market, which strikes me as a better basis for an investment than the conditions we see at Gattaca now.

I think it is a good idea to keep an eye on the firm’s debt levels. The company says it has reduced net debt but gives no figures. The last available balance sheet showed net debt running at almost six times the level of annual operating profit, which is on the high side, but the directors are focusing on bringing it down.

At a share price of 850p, the forward P/E ratio runs at just over 14 for the year to March 2019, which seems fair.

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.

Kevin Godbold 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »