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Should You Buy Gresham Computing plc After It Plunged 30%?

Cash

It’s been a tough 2014 for investors in Gresham Computing (LSE: GHT), with the transaction and cash management software specialist seeing its share price fall by 24% from the turn of the year until yesterday’s close.

However, today’s profit warning has sent shares in the company tumbling by a further 30%, meaning that they are now down 46% year-to-date.

Could this, then, be the perfect time to buy a slice of the company? Or, should potential investors wait for further updates before investing their hard-earned cash?

Profit Warning

Today’s profit warning from Gresham means that earnings for the current year are expected to be materially below current market expectations. The cause of this is weak revenues, resulting from delays in new Clareti Transaction Control (CTC) contracts. As a result, contracts that had been forecast to be booked in FY 2014 will now not be included in the current year’s figures; instead being delayed until FY 2015.

This means that revenue for the current year is now expected to be between 10% and 15% lower than current market expectations, which is likely to mean that earnings are below their FY 2013 level, too.

Looking Ahead

Clearly, this is hugely disappointing news for investors as strong top- and bottom-line growth had been pencilled in for the current year. However, Gresham goes on to state that it has a strong pipeline of CTC business and, perhaps more importantly, it continues to see increased use of CTC at existing customers, which could mean higher recurring revenues moving forward.

So, while disappointing, the reason for the profit warning appears to be a delay rather than an irreversible problem with the company’s products, or with a key account. In other words, it appears as though it is more of a ‘blip’ as opposed to be problem that will linger over the long term.

Timing

Of course, further delays could lie ahead. Indeed, using last year’s earnings, Gresham continues to trade on a rather rich price to earnings (P/E) ratio of 15.4. In other words, strong growth is still being priced in despite earnings being expected to fall in the current year.

As a result, it could be prudent to wait for either a more attractive share price or for further updates from the company that show the delay was a one-off and is not a recurring problem.

After all, patience has never lost anyone any money.

Indeed, while it may be worth waiting a little while before investing in Gresham, The Motley Fool's Top Growth Share Of 2014-15 still looks well-worth buying right now.

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Peter Stephens 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.