The Avon Protection (LSE:AVON) share price is on fire this morning, rising by nearly 15% at the time of writing. And yet no new announcements have been made by this business. The upward boost is undoubtedly a pleasant sight for shareholders, given the downward trajectory the stock has been on over the past 12 months. In fact, even with today’s recovery, returns over the last year still stand at a disappointing -73%. So, what’s going on? And should I be buying the shares today?
Product failure leads to volatility
While the Avon Protection share price might be up today, it was only last Friday when the business lost almost half its market capitalisation. I’ve already explored what happened last week. But as a reminder, management released an update on its body armour business. The firm has recently signed a contract with the US Defence Logistics Agency to supply its new Enhanced Small Arms Protective Inserts (ESAPI) armour plates.
However, these plates failed during early-stage testing. Consequently, the approval process has been significantly delayed and is now expected to be completed by mid-2022. This was the catalyst that sparked the massive sell-off last week, as a sizable chunk of the group’s 2022 revenue guidance was based on this contract. As a result, management expects full-year performance to be at the lower end of expectations. And to make the necessary corrections as well as complete additional auditing work, full-year results have also been delayed.
There has yet to be any confirmation as to when its next annual report will be released. But in my experience, investor frustration and a lack of information is not a good combo. So, seeing the Avon Protection share price plummet on this news was hardly surprising. But why is it now climbing again?
The rising share price
After reading the trading update last week, my conclusion was that the market had seriously over-reacted. Avon Protection’s revenue stream is far from compromised since most of its profits are actually generated from its respiratory devices and ballistic helmets. What’s more, the potential income from its new ESAPI plates isn’t lost, merely delayed.
The Avon Protection share price has long been trading at a lofty premium. This is undoubtedly a contributor to the high degree of volatility seen over the last few days. But after having the weekend to process the information, it seems the market is starting to agree with my conclusion. So today’s upward momentum appears to be driven by investors taking advantage of the low price.
Final thoughts
Despite this recent speed bump, I still believe Avon Protection and its share price has enormous growth potential over the long term. With the stock now being priced at a far more reasonable valuation, even after today’s boost, I remain tempted to add some shares to my portfolio.
