In recent weeks, I’ve flagged up Avon Protection (LSE: AVON) as being a potentially interesting contrarian buy. Unfortunately, it would seem that my cautiously bullish call was rather premature. The AVON share price has crashed over 40% today following an awful update on its body armour business.
Product fail and delays
This morning, the mid-cap respirator and ballistics protection supplier revealed that its Enhanced Small Arms Protective Inserts Vital Torso Protection (VTP ESAPI) body armour plates had “encountered a failure” in testing. As a result, the company expects a significant delay in approving this product.
The bad news didn’t end there. To make matters worse, Avon also announced that it had faced further delays in getting final approval for its US Defense Logistics Agency ESAPI plates. This process is now expected to complete in Spring 2022.
Naturally, none of this is great for Avon’s top line. It previously expected its body armour division to generate $40m in revenue in FY22. However, the company now believes this contribution will be “significantly reduced“. Worryingly, the Melksham-based firm concluded that the full extent of the damage would depend on the outcome of a strategic review management has now instigated.
All told, it’s hard to imagine a worse update than this one. Yes, products failing tests is nothing new. However, we’re talking about life-saving products here. If any company needs to get things right first time, it’s Avon.
Not really. I suppose one crumb of comfort existing holders is that only Avon’s body armour business appears to be suffering issues. By contrast, the company has said that its respiratory and helmet divisions were “unaffected“.
Having fallen 73% in value from where it stood just 12 months ago, one might also argue that the risk/reward trade-off is now even more attractive.
Then again, there’s nothing to say that the Avon share price can’t keep falling. Management’s decision to delay the release of full-year results until December could induce further selling in the weeks ahead. Even when it does report these numbers, it’s clear that the earnings outlook will be a lot worse than previously thought. This is before we’ve even considered the impact of headwinds previously highlighted by the company (supply chain issues and a “tight” labour market in the US).
Avon share price: bullet dodged?
Today’s fall in the Avon share price looks excessive to me. Nevertheless, the frustration felt by investors isn’t unwarranted. I must say that I’m shocked by just how quickly things have unravelled. This was once a high-quality company with a leading position in a niche market. I was a holder of the stock myself until the valuation began to look too rich.
My takeaway is that these problems are fixable and that the stock could recover. However, it’s clear that this will require a lot of patience from shareholders who may feel they can make far better gains elsewhere. Or perhaps a suitor may race in and snap up the company on the cheap, preventing a full rebound. Notwithstanding the prospect of further delays in the approvals process, I think that’s now one of the biggest dangers if I was considering a buy.
Avon stays on my watchlist as a potential buy though. But my goodness, it needs to start protecting its owners more.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Avon Protection. 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.