The Motley Fool

Is Essentra plc’s 10% slump on profit warning a buying opportunity?

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.

Components and solutions specialist Essentra (LSE: ESNT) has reported a profit warning, sending its shares down by as much as 10%. Clearly, this is hugely disappointing for the company’s investors and means there could be a period of uncertainty in the near term. However, does it also signal a buying opportunity, with a lower valuation providing additional scope for capital gains?

A tough period

The performance of the company’s Health & Personal Care Packaging division has been below expectations for the 2016 financial year. Revenue and profitability have declined significantly as a result of continuing operational issues in the last two months of the year in particular. This means that while trading in the Component Solutions and Filtration Product divisions has been in line with expectations, the company’s overall profitability will be at, or modestly below, the bottom end of previous guidance. As such, adjusted operating profit will be £137m or lower.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Potential improvement?

Perhaps the most disappointing aspect of today’s trading update is the fact that Essentra believes the situation won’t improve in the short run. Although there will be a specific focus on the division by the CEO and other senior managers, the 2017 financial year could see more disappointment. Therefore, it would be unsurprising for the company’s share price to fall further in the short run.

Beyond that, there’s upside potential. Essentra trades on a price-to-earnings (P/E) ratio of just 11.8, which appears to represent good value for money. In the current year it’s forecast to post a fall in earnings of 5%, but in 2018 the company is due to reverse this with growth of 10%. This puts it on a price-to-earnings growth (PEG) ratio of 1.2, which provides further evidence of its attractive valuation. And with a yield of 4.9% from a dividend which is covered 1.7 times by profit, it could be a sound buy for income investors too.

A better option?

However, within the support services sector there may be a better option. Plumbing and heating products specialist Wolseley (LSE: WOS) is expected to record a rise in its bottom line of 18% this year, followed by further growth of 10% next year. This has the potential to improve investor sentiment in the stock and since much of the company’s business is focused on North America, it could benefit from weaker sterling to a greater extent than many of its sector peers.

Although Wolseley has a PEG ratio of 1.6, it offers a lower-risk profile than Essentra. Its outlook is relatively robust and its shares are unlikely to be as volatile. Furthermore, it has dividend growth potential, with its shareholder payouts covered 2.6 times by profit. As such, its 2.3% yield could rise sharply over the medium term.

While Essentra may be worth buying for the long run, its shares are likely to be volatile in the coming days and weeks. Therefore, Wolseley seems to be the better buy, with its more robust and consistent growth outlook providing a superior risk/reward ratio at the present time.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

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

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.