The Avon Protection (LSE:AVON) share price crashed by nearly 30% last week following a disappointing trading update. So far, 2021 has not been too kind to this growth stock. And over the past 12 months, it’s down by around 40%. But is it really as bad as investors seem to think? And if not, is this a buying opportunity for my portfolio? Let’s take a look.
What happened to the share price?
I’ve explored this business before. But as a quick reminder, Avon Protection designs and manufactures personal protective equipment for first responders and the military. These products include a wide range of gas masks and ceramic body armour.
Last week, the management team released an update on the firm’s progress. And at first glance, it looked pretty decent. Thanks to continued demand, the order intake over the 10 months ending in July came in at $221m. That’s about 13% higher than a year ago. And should have helped the Avon Protection share price rise.
However, upon closer inspection, not everything is running smoothly. The pandemic continues to interfere with many businesses. And Avon Protection is no exception. Due to labour shortages in the US, disruptions in its supply chain, and delays in receipt payments, the company has had a lot to deal with. And despite management’s best efforts, around $22m of income is expected to be delayed.
Consequently, the defence business has adjusted revenue guidance for its 2021 financial year to lie between$245m and $260m. That’s significantly lower than the $282m expected by analysts. And to make matters worse, management believes the disruptions will continue into 2022, leading to another cut in revenue guidance for the next financial year as well. So seeing the Avon Protection share price take a hit is not that surprising to me.
A buying opportunity?
Despite these disappointing developments, I believe investors may have overreacted here. The cut in guidance is not a pleasant sight, but the missing revenue isn’t lost, merely delayed. What’s more, the root of the problem does not appear to stem from the business itself but rather from macro-economic factors beyond the firm’s control.
As the pandemic starts to come to a close, these disruptions should naturally resolve themselves. This, in turn, will subsequently allow Avon Protection and its share price to resume delivering its historical growth. At least that’s what I think. And it seems management agrees, given it has stated, that “longer-term cash flow dynamics continue to be strong”.
The bottom line
The Avon Protection share price has a history of trading at a lofty valuation. So, seeing this level of volatility on what I believe to be a temporary setback is not too surprising. But even after this most recent decline, the stock is still trading at a price-to-earnings ratio of 140!
In February, I said the Avon Protection share price looked too expensive. And so far, it seems I was spot on. Today, my opinion still hasn’t changed. So I’m still keeping this business on my watchlist for now.
