Why I’m avoiding the temptation to buy Xaar plc and Integrated Diagnostic Holdings plc

Here’s why I’m keeping away from Xaar plc (LON:XAR) and Integrated Diagnostic Holdings plc (LON:IDHC) despite them looking attractive on the surface.

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Inkjet technology expert Xaar (LSE: XAR) delivered full-year results that disappointed the market today with the shares down around 8% as I write.

Profits slipping

Although adjusted revenue was up 2.9% compared to a year ago, profit before tax slipped by 6.3% and diluted earnings per share dropped 13%. Net cash inflow from operations plunged 65%, the gross profit margin slipped 3% and the operating margin jolted down 9%.

That looks like a lot of negatives in the figures so I’m not surprised to see the shares down today, which continues a plunge from over 550p during the autumn of 2015 – a decline in excess of 39% at today’s 333p price.

Chief executive Doug Edwards explained that the firm is aiming to convert customers from well-established analogue manufacturing techniques to digital inkjet solutions and drive up revenues to £220m by 2020. Today’s revenue figure of just over £96m suggests the size of the opportunity for Xaar, but the big question is will those revenues, if they occur, generate meaningful profits for the firm? Based on today’s reporting, I don’t think we can take it for granted that they will.

Ploughing capital into R&D

Part of the challenge could be that Xaar seems to invest a lot of capital in research and development (R&D), much of it just to stay ahead of the game in the face of fierce competition. Gross R&D spend was up 12.5% at £22.4m, which is around 1.3 times operating profits. The stakes are high, and if today’s R&D doesn’t hit the mark by generating profitable products, the shares could slip further down.

On the other hand, investment in R&D can really drive good trading when it clicks, but I’d want to see evidence of improvements in the figures and a share price turning up before investing.

Stellar trading

It’s hard to fault Egyptian medical diagnostics firm Integrated Diagnostics Holdings(LSE: IDHC) trading figures presented in today’s full-year report. Revenues and gross profit inflated 15% compared to a year ago, net profit rocketed 72% and earnings per share shot up a massive 79%.

On that showing, it seems safe to conclude that trading went well. The directors agree, hiking the dividend by 100%. However, the firm’s location in Egypt caused problems due to a 50% deflation of the Egyptian pound, which led to a net foreign exchange loss of EGP89m.

 Chief Executive Dr Hend El-Sherbini reckons the firm worked hard to reduce costs and increase sales to mitigate the negative effects of currency valuation and inflation. She said: “Our ability to keep the costs of our materials in check reflects both the strength of our supplier relationships and the significant volumes we regularly purchase from them.”

Despite the strength of the firm’s financial results, I feel uneasy about Integrated Diagnostic’s exposure to such volatile currency movements due to its location in the world. The shares seem locked in a wilful downtrend too, falling some 135% since August 2015. Taken together, these reasons are enough to keep me away from the shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Kevin Godbold 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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