MENU

Should You Buy Spirent Communications Plc After Today’s Profit Warning?

Sharesspirent in Spirent Communications (LSE: SPT) fell by 18% when markets opened this morning, after the mobile network testing specialist admitted that weak demand for its services means revenue and profits will fall below expectations this year.

The nitty-gritty

Spirent said that third-quarter revenue would be “slightly below $110m” compared to $107.7m last year — in other words, third-quarter revenue will be flat.

Similarly, fourth-quarter revenue is expected to be $120m-$125m, compared to $115.4m last year. Although that’s an increase, it’s significantly less than the “high single digit organic revenue growth supplemented by strategic acquisitions” the firm predicted as recently as July.

As a result, operating profit will be lower than expected — indeed, my calculations suggest that full-year operating profit could be around $29m, significantly lower than the $39.1m achieved in 2013.

What’s gone wrong

Spirent said that trading conditions had softened in the third quarter in the world’s two largest economies, the United States and China, which jointly accounted for around three-quarters of the firm’s sales during the first half of this year.

According to the firm, delayed capital expenditure and an increase in merger activity means that activity levels have fallen in its Networks and Applications business, which accounts for around half of Spirent’s sales.

To make matters worse, Spirent says that that the delays in capex are in areas where the firm has increased its investment this year, in a bid to win new business.

Is there worse to come?

The key question with any profit warning is whether it marks the start — or the end — of a company’s problems.

Spirent shares have now fallen by 36% over the last year, and the firm has had a poor time over the last 18 months: although this year’s first-half performance was encouraging, the firm has been struggling with weak demand since 2012.

Steer clear

After today’s fall, Spirent shares still trade on a chunky 18 times 2014 forecast earnings — and these forecasts are now likely to be downgraded by analysts, making the firm’s shares look even more expensive.

Although Spirent’s financial situation remains strong, with net cash of $168m, I believe there may be worse news to come when the firm publishes its interim management statement on November 13: until then, at least, I would steer clear of Spirent, as I suspect the shares may yet get cheaper still. 

Frankly, it's high risk and should probably only form a small part of your portfolio if you're tempted, in case things don't go to plan.

A good way to diversify a growth portfolio is to include some later-stage growth companies with strong potential but a proven track record of profits and dividends.

If this appeals to you, then I'd recommend a look at "The Motley Fool's Top Growth Stock For 2014".

This British high-tech firm offers an appealing dividend and could deliver double-digit total returnsover the next few years, according to small cap expert Maynard Paton.

To receive your copy of this FREE, no-obligation report today, simply click here now.

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