This FTSE 250 stock just dropped 10%. Should I buy?

This FTSE 250 stock slumped by 10% on Thursday morning after Jefferies downgraded the shares to “hold” from “buy”. But is now a good time for a contrarian buy?

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FTSE 250 stock TI Fluid Systems (LSE:TIFS) fell by 10% in early morning trading. The UK-based manufacturer of highly engineered fluid storage, carrying and delivery systems has seen its share price collapse over the past year from highs of 330p a share. As I write, the stock is trading at 163p a share after the morning’s 10% slump.

What’s behind today’s drop?

On Thursday, TI Fluid shares slid as brokerage Jefferies downgraded the stock to “hold” from “buy”. The US investment bank also slashed its price target to 195p from 350p, representing a substantial change in its assessment of the UK firm.

Jefferies contended that the conditions being faced by the automotive parts maker were among the most difficult in its coverage. The bank added that it expects 2022 will be be “another highly challenging year“.

Jefferies also stated that TI Fluid will struggle to recover rising raw material and inflationary costs from customers versus previous expectations. It is not convinced about expectations that TI Fluid Systems will be able to benefit as much a some believe from the growth in vehicle electrification either. Jefferies said that the expectations on electrification upside “may be too high”.

On a positive note, it said that the long-term equity story remains attractive.

Risks for TI Fluid Systems

TI Fluid Systems designs, manufactures, and sells fluid storage, carrying, delivery, and thermal management systems for predominantly light vehicles, such as cars. All vehicles need these products to work. As such, you’d imagine that demand for the products it designs and sells is fairly inelastic.

However, it’s not been an easy year for the vehicle sector. The current semiconductor shortage has caused havoc for car manufacturers. Just try getting hold of a new car in the UK right now, it’s really not easy.

Electric vehicles also require more of the products that the firm designs. As such, the company, in theory, should benefit from the increased production of electric vehicles in the coming years (despite the Jefferies view). But in the short term, EV production has also been hampered by the semiconductor shortage.

It is also apparent that inflation and raw material costs appear to be weighing on the company’s share price.

Prospects for TI Fluid Systems

As noted by Jefferies, the long-term prospects for this firm look good. In the long run, the trend toward electrification of motor vehicles should stimulate further demand, albeit perhaps not as much as previously anticipated, according to Jefferies.

However, revenue is yet to reach pre-pandemic levels and the same goes for profit. The manufacturer posted a pre-tax profit €65.9m for 2021 compared with €50.8 million for the year earlier.

The company noted the difficulties of the operating environment but said the number highlighted the business’s resilience.

The dividend yield certainly isn’t particularly attractive, but I’m quite interested by the long-term prospects of this company. It’s a stock I’m looking at buying for my Stocks and Shares ISA.

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.

James Fox has no position in any of the shares 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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