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A 30% fall of 155p in the share price of Psion (LSE: PON) to 455p suggests that either this "new economy" thing has thankfully passed, or it never really applied in the first place. All we had was plain old-fashioned bubble.
The reason for the dramatic fall in the share price was a profit warning from Psion saying that profits would be well below expectations. Note the phrase "well below". This is not a gentle profit warning; this is a horrible nasty one. And it is not as if there was a lot of profit to cut anyway. Forecasts for earnings per share for this year have already slumped from 7p down to 1p. The latest news must mean that it will make a loss this year.
The culprit in this case, as in so many excuses these days, is the weakness of the euro. Psion, like many technology companies, pays for its components in dollars. But unlike its rivals, Psion sells a lot of its handheld computers in Europe, and that means that when sales are translated into sterling it accounts for less than it did last year. The company is also experiencing rising costs for components, particularly memory, and a slowdown in the higher margin PC Card modem business. As a result of these factors it says margins have shrunk by 4% this year.
On top of that the company is taking a £2.5m charge to the Psion Connect division to remedy the problem of falling margins in PC Card modems, though the lower margin OEM business continues at good levels.
However, it is not all bad news. The Teklogix acquisition in Canada has been completed, is going well and has absorbed Psion Enterprise to create a new integrated unit to focus on the provision of enterprise wireless networking solutions. It is now Psion's largest division, making up half the total revenues. Moreover, Psion Connect expects to ship its first Bluetooth product early in 2001, but breakeven won't be achieved until the second half.
Bulls of the stock will not be too worried about today's news because most are buying for its 28% stake in the Symbian consortium developing operating systems for mobile phones. The statement says that this is on track.
Nevertheless, there is a strong message here for investors. New economy stocks are not immune from the laws of economics and the weak euro is major problem for all companies. Particularly vulnerable will be those that have recently made acquisitions in Europe. Trading updates from the likes of Vodafone (LSE: VOD) and QXL (LSE: QXL), and results from Lastminute.com (LSE: LMC) next week, could be interesting.
Where Next?
The Psion discussion board is humming. And a glance back at this duel shows just how right TMF Nigel was. And the Rule Shaker has got some of these shares. This article on how to read company statements might help, as should this one on the euro.