The UK’s leading outsourcing specialist Capita Group (LSE: CPI) has been the biggest faller in the blue-chip FTSE 100 index so far this year, having shed around 60% of its value over the last 12 months. So, could this be a once-in-a-lifetime opportunity to grab a sensational bargain, or should investors remain cautious and resist the lure of the heavily-discounted share price?
Oh, what a difference a year makes. In the summer of 2015 the London-based outsourcing giant was enjoying its time in the sun after seeing its shares climb to record highs of 1,326p on the back of another successful year of steady growth. In fact, since 2001 Capita hasn’t failed to report growth in both its sales or underlying earnings even once. But it looks like 2016 could be the year it bucks that longstanding trend after the firm yesterday issued its second profit warning in just three months.
Capita said that it now expects underlying pre-tax profits for 2016 to be “at least £515m”, somewhat lower than the £535m to £555m guidance it gave in September, which in itself was well below previous estimates of £614m. The market duly responded, sending the shares 14% lower and changing hands at their lowest level in 10 years.
Capita has had a tough year with a slowdown in its IT Enterprise Services division, costs incurred from its Transport for London contract, and delays in client decision-making all contributing to the downgrade in full-year profits guidance. In response, the board has decided to sell the majority of the Capita Asset Services division and a small number of other non-core businesses, as well as reducing costs, in a bid to become leaner, reduce debt and strengthen its balance sheet.
With Capita’s shares now trading on an ultra-low P/E rating of just seven for the current year, I can certainly see why contrarians would want to consider Capita as a long-term recovery play. But I expect analysts’ earnings estimates to be revised downwards over the coming weeks, and the shares might not be such a bargain after brokers have finished wielding the axe on their profit forecasts. Capita may well turn things around, but I think it’s far too early to be making any buying decisions so soon after the announcement.
Worse for wear
Another firm looking worse for wear this year is specialist building products distributor SIG (LSE: SHI). The FTSE 250 firm lost over a fifth of its value and plunged to near five-year lows last month as it too issued a profit warning for 2016. The group cited delays to some projects in the commercial sector and subdued demand for technical insulation in the petrochemical and manufacturing sectors as the main reasons for the lowered profits guidance.
As a result, the City is now expecting the Sheffield-based firm’s profits to shrink by 12% to £58.27m this year, with a further drop to £56.36m expected in 2017. With no growth in sight, I’d be inclined to give this one a wide berth too.