Despite this downward trajectory, the group’s 12-month return is still a respectable 10%. So what was in this announcement that has investors so upset? And should I look at this as a buying opportunity for my portfolio?
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A bit of background
As a quick reminder, Rotork is a global engineering company leading the charge in flow-control instruments. These are specialist tools used throughout several industries, including oil & gas, water & waste management, and chemicals production.
Although the business sells a niche collection of products, it seems demand from its customers remains strong. Why? Because over the last four months, order intake is up by a high single-digit percentage in-line with expectations.
Despite pandemic disruptions, customers are still spending increased amounts on upgrading or developing new facilities that require the firm’s instruments. Needless to say, rising demand and a growing pile of orders is a positive sign for the Rotork share price. So why is the stock falling?
Covid-19 versus supply chains
Developing and manufacturing specialist equipment requires unique components, specifically semi-conductor chips and electronics. But due to the pandemic, resource deliveries to the group’s manufacturing facilities are frequently delayed, often on short notice.
Consequently, several production lines have had to be shut down repeatedly for periods spanning up to several weeks. In other words, while customer orders are on the rise, Rotork is struggling to fulfil them.
Since the company usually gets paid on item delivery, revenue over the past four months is down year-on-year. And due to inflationary pressures pushing up the cost of raw materials, operating profit margins have also taken a significant hit. That’s obviously bad news for the Rotork share price.
Over the long term, supply chain disruptions will eventually be resolved. But in the near term, they’ll likely continue to pose a problem. At least that’s what management thinks since it provided guidance that expects revenue to stay depressed for the remainder of the year.
Is the falling Rotork share price a buying opportunity?
Seeing the revenue stream getting somewhat derailed is frustrating. But due to the exceptionally niche segment Rotork operates in, its list of competitors is quite short. And all of them are likely suffering from the exact same issues. That indirectly creates a bit of stickiness for customers simply because there isn’t really an alternative firm to source necessary components from.
Supporting evidence of this is clear since management anticipates “entering 2022 with a record year-end order book.”
If the company can get its products off the manufacturing line and into customers’ hands next year, today’s drop in Rotork’s share price could be a buying opportunity for my portfolio.
Personally, I’m going to wait and see what happens before committing to an investment. Therefore, Rotork is staying on my watchlist for now.