Shares of performance plastics producer Carclo (LSE: CAR) are sliding today, after the company issued a mixed trading update. In particular, the company reported that trading across the group was in line with expectations but revealed that management had started a full strategic review of the company’s CIT technology business.
Unfortunately, as a result of this review management has cautioned that the assets of the CIT business, both intangible and tangible, could be written down significantly at the half-year end.
Nevertheless, according to the company all other divisions have traded in line with expectations during the first half of the year. The board believes that the group’s underlying profit before tax will be in line with its full-year expectations.
Today’s news from Carclo sends a mixed message. On one hand, the company states that it is trading in line with expectations and full-year profit will meet City forecasts.
However, the group has also cautioned that the majority of income will fall during the second half of the year, and the company will have to take a writedown on the value of assets related to the CIT business.
With the majority of group income falling during the second half of the year, there’s still plenty that could go wrong for the group and inhibit growth. Further, writedowns are likely to significantly impact full-year earnings figures.
With the bulk of Carclo’s trading year still to come and the possibility of hefty writedowns on the horizon, the company’s high valuation does not leave much room for error.
Indeed, at present levels Carclo trades at a forward P/E of 16.8, a high growth multiple which leaves little room for disappointment. Additionally, this valuation does appear to be slightly expensive, considering the fact that Carclo is only expected to report earnings growth of 10% this year. Unfortunately, if Carclo fails to meet this growth target then the company’s share price could fall to a more reasonable valuation.
City analysts expect earnings per share to jump by 36% next year, which means that the company is trading at a 2016 P/E of 12.4.
Still, for the time being Carclo’s management seems relatively certain that the group can meet full-year earnings forecasts. And reading through today’s trading update it seems as if, for the time being, Carclo is set to meet this targets with the majority of the group’s divisions are trading ahead of last year.
So, for the time being Carclo remains an attractive investment, although there could be risks ahead.
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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.