Shares in global manufacturing group Carclo (LSE: CAR) plunged by around 50% in early deals this morning after the company issued a sudden profit warning.
According to the update, thanks to “an unexpected delay in the awarding of two large tooling and automation contracts,” as well as the lack of an increase in order volumes from a “a large and long standing non-medical customer,” management now says profit for the full-year should be “significantly below expectations.“
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Not only has the reduced order volume had an impact on current year trading, but management also expects there to be a knock-on effect for the 2018/19 financial year. Specifically, the update says as “a consequence of some of these delayed projects and lower customer orders, the Board has now reduced its profit expectations for the 2018/19 financial year” although it goes on to say that the “revised expectations will still represent healthy year-on-year growth.“
Unfortunately, this isn’t the first time Carclo has disappointed investors. Between mid-2012 and mid-2014, shares in the group declined from 470p to 90p as the firm consistently missed growth expectations. After several years of steady performance, it had begun to look as if the company was getting back on track but it now seems as if it is plagued by the same problems.
This is why I would avoid catching falling knife Carclo today. Even though the business has stabilised over the past few years, as today’s press release notes, there’s an “ongoing reliance upon winning new tooling and automation contracts” to generate sustainable sales growth, which will continue to weigh on growth for the next few years. However, from 2019 onwards, Carclo’s Led Technologies business is expected to begin to yield results, and this should help reduce dependence on the Technical Plastics arm, which is responsible for today’s warning.
Placing a value on the shares
Now that management expects the company to miss expectations for the full year, it’s challenging to try and put a value on the shares. City analysts had been expecting earnings of 12.6p per share, rising to 15.2p for the year ending 31 March 2019. Based on these estimates, the shares are trading at a forward P/E of 9.9. Now however, it’s impossible to place a value on the shares until management can issue further guidance.
So all in all, I’d avoid Carclo after today’s update from the company. Until management offers us more clarity on the firm’s earnings, it’s going to be difficult to work out just what the shares are worth. Also, profit warnings tend to come in threes, so there could be further bad news on the horizon. Considering Carclo’s history, I wouldn’t be surprised if this turns out to be the case. There are other more attractive looking opportunities out there, one of which is profiled below.