Why Management Consulting Group PLC Slumped 20% Today

International professional services group Management Consulting’s (LSE: MMC) shares have collapsed by more than a fifth today, after the company became the latest small cap to issue a profit warning. 

Management revealed today that the group’s business outlook has deteriorated over the past few months and, as a result, profit expectations for 2014 have been significantly reduced. This weakness can be traced to the group’s Alexander Proudfoot business, where order input for the last two months has been below expectations. What’s more, some client projects have been pushed back from 2014, to 2015. The business is now expected to report a small operating loss for the year as a whole.

Commenting on today’s warning, Nick Stagg, Chief Executive said:

“Recent order input in Alexander Proudfoot has been disappointing and as a result we have significantly reduced our performance expectations for the Group for the year as a whole…Kurt Salmon performed well in the first half, and although some project deferrals and a slow summer period in France will have a negative impact in the short term, the underlying trends in the business remain encouraging. The medium term outlook for the Group remains positive.”

Mixed news

Even though today’s profit warning is concerning, reading through Management Consulting’s RNS on the matter, it seems as if the company is still making solid progress in some areas. 

For example, while the Alexander Proudfoot business has performed below expectations, management has made good progress with its ‘change initiatives’. In particular, the group has recently set up a dedicated natural resources business unit, which is performing ahead of expectations. 

Still, despite patches of strong performance, Management Consulting is struggling. Business across both of the company’s core divisions, Alexander Proudfoot and Kurt Salmon is slower than expected, with projects being hit by delays and low order levels during the second half of the year.

Adding to concerns is the group’s rising level of net debt. Indeed, at the half year stage Management Consulting had net debt of £48m, giving a net gearing figure of 25%. The company revealed today that its net debt pile had grown over the past two months, as a result of the slower-than-expected summer trading period. 

Time to buy 

Should you buy in after today’s slump? Well, current City forecasts indicated that Management Consulting is trading at a forward P/E of 12.7. However, it’s likely that these forecasts will be revised downwards following today’s profit warning. 

But how low can the forecasts go, it’s not really possible to tell, although there’s a chance that with the Alexander Proudfoot making a loss during the second half of the year, earnings forecasts could be cut in half. On this basis, it would be wise to wait for more clarity before making any trading decision.

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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.