Shares in technology products business Premier Farnell (LSE: PFL) have fallen by as much as 14% today after it issued a profit warning. This comes after the company issued a profit warning in July, when it said that weak trading conditions mean that profit for the first half of the year would be below expectations.
Today’s results confirm that this has been the case, with adjusted operating profit being 10% lower than in the first half of last year. However, today’s update states that the difficult conditions from the first half of the year are now expected to continue into the second half of the year, which means that full-year adjusted operating profit is expected to be lower than previous guidance, with a figure of £73m to £77m now being given.
Clearly, this is hugely disappointing for investors in Premier Farnell. Furthermore, it means that dividends have been cut by over 40% and, with further challenges due in the short run, it would be of little surprise for them to be cut further. In fact, although Premier Farnell appears to have a sound strategy to turn its performance around, it seems likely that its share price will come under further pressure in the months ahead. As such, and while it is a stock worth watching, now may not be the opportune moment to buy.
Similarly, Premier Inn and Costa owner Whitbread (LSE: WTB) is also enduring a rather challenging period. This is due to the potential impact of the new living wage, which is set to negatively impact on the company’s performance moving forward. That’s because a large proportion of Whitbread’s employees are paid the minimum wage and, as a result, the company’s cost base will rise relatively quickly.
Whitbread has stated that it will increase prices to cope with the additional costs. While this sounds logical, the impact on demand is a known unknown. Certainly, Whitbread has a very good reputation, but its customers may be unwilling to pay higher prices without increases in service levels. As such, and while the company trades on a very appealing price to earnings growth (PEG) ratio of 1.3, there may be better moments for purchase over the medium term.
Meanwhile, BP (LSE: BP) has also endured a challenging period, with a lower oil price hurting its sales and margins. Clearly, its future performance is highly dependent upon the price of oil, but for investors who are willing to take a chance on a higher oil price further down the line, BP appears to be a very sound place to invest.
That’s at least partly because it continues to drive through efficiencies and put itself in a sound financial position to withstand a prolonged period of oil price weakness. This may cause BP’s position relative to its peers to improve – especially since it has a strong, diversified asset base. And, while dividends may be cut if profitability fails to improve, even a halving of BP’s dividend would leave it yielding a very enticing 3.8%. As such, a wide margin of safety appears to be on offer.
