Is this dividend-paying mid-cap a steal, down 20% today?

Why I think the market reaction to this quality firm’s update looks fair, but the share now has decent recovery potential.

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Oh, my goodness! The market has certainly been spooked by today’s full-year results report from medical products and technologies company ConvaTec Group (LSE: CTEC). The shares plunged more than 20% in early trading.

But has the move been over-done? What’s the panic about anyway? Let’s take a closer look to see if the stock’s worth buying now that it’s on sale.

A nasty habit

ConvaTec arrived on the stock market in the autumn of 2016 and has seemingly developed a nasty habit of issuing pre-winter profit warnings! One in October 2017 pulled the rug from under the share price and, blow me down, the company repeated the profit-warning trick last October, causing another downward lurch in the shares.

Today’s sharp move lower means the current share price around 120p is more than 40% below the initial listing price back in 2016. For those buying at the time of the IPO, this hasn’t been a good investment – so far.

Yet the report today seemed encouraging to start with. Revenue in 2018 grew 3.8% year-on-year and earnings before interest and tax (EBIT) moved 8% higher. However, it doesn’t take long for the negatives to appear. Adjusted EBIT dropped by 6%, which the firm explains, was because of higher investment “in commercial activities” and “negative (product) mix,” which more than offset any benefits from the increased revenue. The EBIT profit margin dropped to 23.4% from 25.9% the year before, suggesting the firm’s trading niche could be subject to erosion from competition or, perhaps, from weaker demand.

Then there’s a sub-heading in the report: “Actions to address strategy execution issues,” which suggests the main challenges could be internal. In essence, the firm plans to throw money at the problem in order to restructure. That’s disappointing. I want my recently IPO’d companies to be at tip-top efficiency with a proven business model, not arriving on the stock market floundering, trying to make the business work.

Refreshing honesty

Interim chief executive Rick Anderson is direct in the report. “These are disappointing results,” he said. “It is clear that swift and strong action is required to address the failures in execution which have caused the Company to underperform.”

I must say, I like this approach, which is so refreshing compared to some of the old flannel a lot of company directors spout out when they are trying to put a positive spin on a poor performance. A direct assessment like Anderson’s tells us exactly where we are and allows the share price to move where it needs to go, thus minimising the chances of a false market if things are interpreted too positively by investors.

The company is searching for a permanent chief executive to appoint, which could be positive. I like change at the top in businesses because it can usher in a period of renewed vigour and progress. I also like the sector, which is known for its defensive, cash-generating characteristics. Meanwhile, Convatec has a plan to invest and to sort out its execution issues. I think there’s a reasonable chance that the worst of the bad news could be behind us. So I’m tempted to hold my nose, block out the fear, and to dip my toe in the water by grabbing a few of 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 assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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