The stock market doesn’t like it when companies lower their earnings forecasts. But falling prices can be great opportunities to buy shares.
Earlier this week, Judges Scientific (LSE:JDG) announced earnings for 2025 are likely to be below expectations. The stock fell 16% on the news, but that’s put the stock on my buy list for August.
What’s the problem?
It’s never good when companies cut their guidance and it’s especially bad for growth stocks. So it’s not a surprise to see Judges Scientific shares falling, but the problems are quite distinctive.
2024 wasn’t a good year for the firm, with revenues falling 2% and earnings per share (EPS) down 24%. And so far, the anticipated recovery in 2025 hasn’t materialised.
The key issue is weak sales in the US, which accounts for 25% of total revenues. Put simply, the scientific instrument firm depends on research funding and this is in short supply right now.
As a result, the firm lowered its EPS guidance for the year to between £2.85 and £3.30. That’s below the £3.67 the market had been expecting and why the stock’s falling.
Core revenues
Interestingly, Judges Scientific announced that revenues and profits for the first half of the year are actually higher than the previous year. Organic sales are up 7% and EPS grew 15%.
That doesn’t sound too bad at all, but the growth’s entirely due to one of the firm’s subsidiaries – Geotek – completing a coring expedition (a geological survey method using core samples) in Japan. But this is unusual to say the least.
As far as I can tell, Geotek has completed two expeditions in the last five years. These have a big effect on revenues and profits, but they’re highly irregular.
As a result, Judges Scientific typically offers adjusted sales and profit figures to account for this. And these show a recovery taking longer than expected, despite a boost from coring revenues.
Opportunity knocks
A difficult trading environment might be a problem for investors focusing on the next six months. But I think those with a long-term perspective might have a very different view.
Judges Scientific’s approach involves acquiring smaller businesses and helping them to improve. This can be risky, but the firm has some key advantages when it comes to buying companies.
The firm itself isn’t that big and this allows it to focus on targets with limited competition. That results in acquisition multiples between 3 and 6 times earnings before interest and taxes (EBIT).
For ordinary investors, there aren’t too many opportunities to invest in companies at that type of multiple. Especially not ones with strong competitive positions that can grow in future.
I’m buying
In the short term, Judges Scientific’s facing cyclical challenges and I’m sure these will show up again in future. But I expect strong growth when these subside in the short term.
I also think the ability to make smart acquisitions at good prices is a good sign for the long term. That’s why I’m buying the stock in August unless something dramatic happens before then.
The revised guidance means the current share price implies a price-to-earnings (P/E) ratio of between 20 and 23. For a firm with both short- and long-term potential, I think that’s a bargain.
