Why Xaar plc Is Falling Today

Specialist printer Xaar  (LSE: XAR) is falling today after the company issued yet another profit warning. 

Xaar’s share have fallen 21.5% at time of writing, after the company warned that revenue for the full year would now fall in the range of £115m to £125m.

What really surprised shareholders, however, was the timing of this warning. Indeed, only six weeks ago management issued a trading statement informing investors that the company was trading in line with forecasts. Unfortunately, this sudden warning implies that trading has suddenly deteriorated.  

For the first six months of 2014, Xaar posted a pre-tax profit of £16.1m, down from £22.3m reported a year ago. Revenue fell 10.1%, to £60.4m, from £67.2m. 

Chinese problem Xaar

It seems as if Xaar’s troubles can be traced back to China. One of the company’s key revenue streams is ceramic tile decoration, demand for which has exploded during recent years, thanks in part to the Chinese property bubble.

However, now China’s property market is starting to cool and competitors are stealing market share, eroding Xaar’s profits. According to Ian Dinwoodie, Chief Executive:

“During the third quarter, demand from the ceramic tile decoration sector has softened, which we believe relates to a slowdown in construction activity in China…Our market leading position in ceramic tiles has, as previously announced, attracted competition, which has negatively impacted pricing, but we have strengthened our offering with several new product launches.”

Still, Xaar’s management team remains upbeat about the future, continuing to see room for growth within some of the company’s other key markets.

Opportunities for growth

Aside from the poor performance within the ceramics division, Xaar’s management is excited about the prospects for the company’s thin film programme. Thin film is expected to open up multiple additional markets for Xaar.  What’s more, prospects for the company’s ‘Direct-to-Shape’ application have brightened. 

As a sign of management’s confidence in Xaar’s future, the interim dividend was hiked 20%, from 2.5p per share, to 3p per share. 

Nevertheless, even after today’s slump, Xaar still trades at a relatively high forward P/E of 14.9. With earnings slated to fall this year, Xaar’s current valuation looks to be over optimistic. I wouldn’t rule out further falls in the company’s share price, especially if trading deteriorates further.  

Further warnings?

This is the second profit warning that Xaar has issued this year, and as the saying goes, bad news usually comes in threes. Unfortunately, it looks as if it could be time to give up on Xaar. 

But there are other opportunities out there. The key, when searching for growth stocks, is looking under the radar. You want to get on board while the company is still an unknown quantity. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.