Low & Bonar (LSE: LWB) has slumped more than 17% today, after the supplier of performance materials warned that its profit before tax, amortisation and non-recurring items for this year will be lower than expected.
The group blamed this under-performance on a drop in demand across European civil engineering markets, due to a slowdown in construction activity across the continent, reflecting the difficult economic climate.
On a 
like-for-like basis, the group’s civil engineering sales grew by 4% in the first half. However, a decline in third quarter orders means that civil engineering sales will be flat for the year as a whole. Sales from this sector represent around a quarter of the group’s overall sales.
What’s more, the group’s civil engineering joint venture in Saudi Arabia has continued to suffer a slower than expected order intake. The division is now expected to report a loss of at least £1m for full-year 2014.
After including all of the above factors, Low & Bonar’s management now anticipates that profit before tax, amortisation and non-recurring items for this year will be around £25.3m, compared to last year’s result of £26.5m – a decline of 4.5%.
Unfortunately, when the company reported its interim results on July 10, management stated that it remained confident that full year profits would show “significant” growth over last year. So today’s warning is a surprise for many investors.
Concerned investors
After this morning’s fall, Low & Bonar’s shares have declined nearly 7% year to date, wiping out most of the gains made over the past 18 months. The shares now trade 30% below their 52-week high of 96p.
Nevertheless, the company’s dividend yield, which currently stands at 3.6% remains attractive. For the time being, this payout appears safe as it is covered two-and-a-half times by earnings per share. City analysts expect Low & Bonar’s dividend yield to hit 4% during 2015.
And with the group’s high exposure to the European construction sector, Low & Bonar remains an attractive recovery play. On the other hand, due to its exposure to Europe, Low & Bonar’s shares remain a risky bet.
A risk worth taking?
Still, after today’s declines Low & Bonar trades at an attractive valuation of 12.8 times forward earnings, which could be an attractive proposition for some investors.
However, it is possible that after the profit warning, it’s likely that City analysts will have to adjust their earnings forecasts for this year and next. As a result, there is a chance that Low & Bonar’s valuation could rise.
But there are other opportunities out there. You see the key when searching for growth stocks is looking under the radar. You want to get on board while the company is still an unknown quantity, that way you won’t need to pay a premium in order to benefit from the company’s growth.
