Why has the NCC share price plummeted?

The NCC share price plummeted by over a third on Friday. Christopher Ruane explains why and considers whether he ought to invest.

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Today has been a disappointing one for shareholders in cybersecurity specialists NCC (LSE: NCC). The NCC share price is down 35% in today’s trading as I write this on Friday afternoon. That means the shares have lost 46% of their value over the past 12 months.

What is going on – and could it present me with a buying opportunity?

Profit warning

The share price fell in response to a profit warning issued by the company this morning.

NCC had been forecasting an adjusted operating profit for this year of around £47m. However, the company told the market that since issuing that forecast, “market volatility has materially increased and is having a significant impact on our near-term cyber security revenue and profitability, particularly in the North American technology sector and to a lesser extent in the UK”.

Accordingly, the company cut its profit forecast to £28m–£32m. It is assessing its cost base and I expect that will lead to it launching some cost-cutting initiatives. NCC also said that it expects the current demand challenges to continue into next year.

Canary in the coal mine

As a tech investor (although not in NCC), the detail of this profit warning sent a tingle down my spine.

NCC spelt out some specific reasons contributing to its lower profit expectations and I think they have relevance far beyond that one company.

Tech firms cutting staff means that buying decisions are now taking longer or being scrapped altogether. Turmoil in the banking sector has led to “reduced appetite to spend on technology projects across sectors”.

In other words, the banking crisis has led to a reassessment of tech spend far beyond banks. NCC also said interest rate rises are causing more inflationary problems for customers.

When a company issues a profit warning, it is not unusual for it to explain how bad the environment is so investors do not just focus on its own performance.

However, if NCC’s analysis is accurate, it suggests we could soon be seeing tech spending cuts impact profits at a range of software and hardware suppliers. While Computacenter struck a positive note in its annual results today, it did comment that “there are plenty of challenges due to the macroeconomic environment”.

There could be many more profit warnings around the corner in this sector, in my opinion.

Assessing the NCC share price

Today’s dramatic fall shows the market definitely did not like what it heard from NCC.

However, the company has been consistently profitable and may well stay so. It has a dividend yield of 4.7%. It has a sizeable customer base and strong long-term growth prospects.

In today’s session, the shares hit a 12-month low. As I write, they trade on a price-to-earnings ratio of 14. That is based on last year’s earnings and so the prospective ratio may be higher. But I do not see that as expensive for a company that remains in growth mode in a business area I expect to see growing demand for decades.

I am not ready to buy yet as I will wait to see whether demand gets even worse. But, with the NCC share price now below a pound, the company is certainly on my watchlist.

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended NCC. 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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