Aerospace and defence company Cobham (LSE: COB) has slumped by 15% today after the release of a disappointing trading update. The company’s profit for 2016 is expected to come in below previous guidance, which has clearly caused investor sentiment to decline. The company has also suspended its dividend and commenced a full review of its financial situation. Could this be the right time to buy it, or should investors wait for further news?
A tough year
While Cobham was expected to record group trading profit in the range of £255m and £275m according to its update in October, it’s now expected to be around £245m. This is clearly disappointing and shows that the business has struggled in what has been a difficult period for the wider aerospace and defence sector.
However, things could get worse before they get better. The new management team is conducting a thorough review that will focus on the balance sheet and on major contracts. The trading profit could therefore change, as there’s significant uncertainty surrounding the outcome of the KC-46 tanker programme. The company continues to be in discussion with the customer on the commercial terms for the complex conformity and qualification phases of the contract. As such, 2016’s profit figure could worsen.
Outlook
Despite its tough year, Cobham was able to reduce net debt to £1.03bn from £1.21bn a year earlier. It has benefitted from a weaker pound and could continue to do so over the course of 2017. Concerns surrounding Brexit are likely to increase as negotiations commence within the next few months. This could lead to greater uncertainty for the UK economy and a weaker pound. That’s especially the case since the dollar is forecast to strengthen as the Federal Reserve adopts a tighter monetary policy, which is expected to yield three interest rate rises this year.
Clearly, Cobham’s outlook is highly uncertain. It’s therefore difficult to forecast how the business will perform in 2017. However, it could be a buying opportunity since it seems likely that the new management team will turn its performance around. A similar process occurred at sector peer Rolls-Royce (LSE: RR), where its financial performance came under severe pressure. However, since it’s a high quality business and under a new management team, it’s expected to record a rise in its bottom line of 45% in the current year.
Therefore, Cobham could deliver a similar turnaround over the medium term. For now though, it seems likely that volatility will remain high. Furthermore, since a review is being conducted on its major contracts, a share price rise seems unlikely until this process is complete. It seems prudent for investors to wait for this process to come to a conclusion before buying it, although in the long run the company could prove to be a strong performer.
