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Why have ST Ives plc shares crashed by a third today?

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Shares in troubled marketing services firm ST Ives (LSE: SIV) have lost around 37% of their value in early deals this morning after the company issued yet another severe profit warning. 

It warned that its results for the full year are set to miss prior expectations due to ongoing weakness in its Marketing Activation unit. Expectations have already been lowered once in the past 12 months after the company warned on profits at the beginning of 2016. Also, some project cancellations and deferrals in the group Strategic Marketing arm will weigh on full-year results.

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In Strategic Marketing, revenue for the first half will rise around 9% year-on-year and revenue at the group’s legacy book business will rise around 11% year-on-year, driven by a “generally positive” pre-Christmas trading period. Still, despite these positive figures, management expects the ongoing problems in Marketing Activation and Strategic Marketing will mean St Ives’s full-year results will be “materially” below its previous expectations. 

Second warning, more cuts

It’s the second time in 12 months that ST Ives has issued such a disastrous profit warning and just as before, management is promising more cost-cutting and diversification to help stabilise the business.

However, it seems that investors may be running out of patience with the group. The shares have lost 70% of their value over the past 10 months, and over the last 10 years, they’ve returned -74%. 

Before today’s update, City analysts had expected the company to report a pre-tax profit of £32m for the year ending 31 July 2017 and earnings per share of 17.7p, giving a forward P/E of 7.1 at current prices. While this valuation may seem cheap, investors need to keep in mind ST Ives’ ability to consistently disappoint.

A better pick? 

As ST Ives plunges, shares in sector peer Communisis (LSE: CMS) are pushing higher after the company published a broadly positive trading update ahead of its annual results on March 9. 

The company reported that trading across the group was in line with expectations with revenue at its Customer Experience arm boosted by a contract won with HM Revenue & Customs. What’s more, the group’s Brand Deployment benefitted from a deal won with Sony Europe.

Communisis has been a relative success story over the past five years. Indeed, since the beginning of 2012, shares in the company have risen 73% and further gains could be on the cards. 

City analysts have pencilled-in earnings per share growth of 14% for the year ending 31 December 2016, and further earnings growth of 6% and 4% is expected for 2017 and 2018 respectively. Despite these attractive growth rates, shares in the media group are trading at a forward P/E of 6.8, and recent declines have pushed the shares’ yield up to 5.9%. The payout is covered 2.4 times by earnings per share. 

Unlike ST Ives, which appears to be cheap for a reason, shares in Communisis seem to be undervalued both in comparison to historic earnings growth and future earnings potential.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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