The XP Power (LSE:XPP) share price suffered another major downturn this morning (16 February). Following today’s trading update, investors once again jumped ship, sending the once-loved electronic components stocks plummeting by around 40%!
What happened? Is there valid cause for concern, or are investors overreacting? Let’s take a closer look.
Another round of disappointment
Trouble at XP Power started to emerge after losing a legal battle with a competitor over trade secrets. The resulting financial aftermath pushed the group’s balance sheet to severe limits. So much so that management had to negotiate with its creditors as it was on the verge of breaching its debt covenants.
While this was going on, the electronics industry as a whole had seen a significant slowdown in demand. Consumer spending on electronic devices has slowed thanks to higher inflation. And with supply chain disruptions improving drastically versus a few years ago, industrial and healthcare technology firms have been destocking their inventory, creating new headwinds for XP Power.
It seems these pressures have reached boiling point as the group has notified investors that full-year revenue will be significantly below expectations. Investors were already holding this business on a short leash. And with yet another profit warning today despite indicating that demand would improve around a month ago, it seems patience has run out.
Is this secretly a buying opportunity?
Despite the massive blow to XP Power’s share price, there were some positive takeaways from today’s announcement. For starters, cash flow generation came in higher than expected last year. As such, the firm is currently on track to lower its net debt-to-EBITDA ratio to 2.5 times by the end of 2024. That’s notably lower than its debt covenant limit of 3.5 times, resulting in more financial flexibility.
Meanwhile, the group’s cost-saving initiatives seem to be moving ahead on schedule. Once fully realised, management expects a significant reduction in overhead costs, paving the way to higher operating margins in the future.
That’s quite encouraging to hear, given the current state of affairs. And at a new price-to-earnings ratio of 8.2, shares have reached their cheapest level in years. So, should I consider capitalising on today’s volatility?
Personally, I’m staying cautious. XP Power was a member of my income portfolio until a few months ago. Poor communication from management ultimately led to a similar sharp drop in share price last year. And today’s fiasco seems to be a repeat performance.
There’s no denying that the firm is having to tackle problems that all its competitors are currently facing. But given the group’s recent track record, I’m not willing to give it the benefit of the doubt right now. Therefore, I’m steering clear and looking elsewhere for bargain buying opportunities among FTSE shares in 2024.
