The set-top box maker sees shares slashed by 40% as margins slip.
One of the high flyers of the technology sector in recent years has been Pace (LSE: PIC), the maker of set-top boxes and related digital telly and communications trickery.
But Pace's share price climb came to an abrupt halt on Tuesday after the company released a stark profit warning. The share price had already wobbled in March on the news that an important US contract had been delayed, but that is nothing compared to the latest tidings.
At first glance, it might seem as if Pace's problems are a result of the Japanese tsunami, but although that did play a part, there are some more fundamentally worrying difficulties.
Falling margins
Profitability in Pace's European business has so far come in below expectations, and poor demand for Pace Networks products has led to that division being closed as a separate business.
Add to this Pace's building up of an inventory backlog after buying in what now appears to be an excess supply of components, and the tsunami effect which hit the supply chain, and we're seeing a profit hit for the first half that the company will not be able to recover in the second.
Full-year guidance has now been lowered by about 20%.
Operating profit margin for the first half is expected to come in at around the 5.5% mark, though it is forecast to be back to its 8% target in the second half. But that will still leave full year profits down in the £97m to £110m range.
The market, unsurprisingly, reacted badly to the news, and the shares fell more than 40% in morning trading -- the size of the fall presumably being partly due to the unexpected nature of the warning, coming more than 4 months into the year.
Harshly punished?
The key question now is, if Pace is able to get margins back up to its longer-term 8% level, will the shares turn out to be over-sold? Cutting the current consensus analysts' forecasts by 20%, the fallen shares are on a full year prospective P/E of only around 4.5 -- though Pace did have a fair bit of debt at its last year end, of around £200m, after raising loans to fund acquisitions.
But if that looks cheap, what will surely worry investors is that Tuesday's statement didn't really offer much in the way of reasons behind the falling profits -- it gave little more than the bare facts. And this comes at a time when the electronic gadgetry business seems to be in a pretty healthy phase.
Is there an opportunity to profit from a panic-led over-reaction here? Maybe, but I'd really like to have seen some more flesh on the bones of that statement, and have some understanding of why things have gone so unexpectedly wrong.
Over to you -- are you going to dip in, or is it bargepole time?
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