Should You Buy Gresham Computing plc After It Plunged 30%?

Shares in Gresham Computing plc (LON: GHT) have fallen heavily. Is now the right time to buy?

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 9 October, 2014 11:23 am BST

| More on: GHT

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.

It’s been a tough 2014 for investors in Gresham Computing (LSE: GHT), with the transaction and cash management software specialist seeing its share price fall by 24% from the turn of the year until yesterday’s close.

However, today’s profit warning has sent shares in the company tumbling by a further 30%, meaning that they are now down 46% year-to-date.

Could this, then, be the perfect time to buy a slice of the company? Or, should potential investors wait for further updates before investing their hard-earned cash?

Profit Warning

Today’s profit warning from Gresham means that earnings for the current year are expected to be materially below current market expectations. The cause of this is weak revenues, resulting from delays in new Clareti Transaction Control (CTC) contracts. As a result, contracts that had been forecast to be booked in FY 2014 will now not be included in the current year’s figures; instead being delayed until FY 2015.

This means that revenue for the current year is now expected to be between 10% and 15% lower than current market expectations, which is likely to mean that earnings are below their FY 2013 level, too.

Looking Ahead

Clearly, this is hugely disappointing news for investors as strong top- and bottom-line growth had been pencilled in for the current year. However, Gresham goes on to state that it has a strong pipeline of CTC business and, perhaps more importantly, it continues to see increased use of CTC at existing customers, which could mean higher recurring revenues moving forward.

So, while disappointing, the reason for the profit warning appears to be a delay rather than an irreversible problem with the company’s products, or with a key account. In other words, it appears as though it is more of a ‘blip’ as opposed to be problem that will linger over the long term.

Timing

Of course, further delays could lie ahead. Indeed, using last year’s earnings, Gresham continues to trade on a rather rich price to earnings (P/E) ratio of 15.4. In other words, strong growth is still being priced in despite earnings being expected to fall in the current year.

As a result, it could be prudent to wait for either a more attractive share price or for further updates from the company that show the delay was a one-off and is not a recurring problem.

After all, patience has never lost anyone any money.