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Is Oxford Instruments plc’s Profit Warning Bad News For Premier Farnell plc & Imagination Technologies Group plc?

Oxford Instruments’ (LSE: OXIG) shares have lagged the market today, following the release of the company’s lacklustre full-year results. 

The producer of nanotechnology tools and parts for CT and MRI scanners revealed a 24% fall in full-year pre-tax profit to £35.6m. On an organic constant currency basis, revenues declined by 5.4%. Adjusted earnings per share fell to 48.2p, from 67.6p as reported in the year-ago period. 

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Management blamed tough trading in Japan and Russia for this set of poor results, along with weaker-than-expected trading in the company’s industrial analysis arm. 

And to try and return to growth, Oxford has announced today that it  has cut 160 jobs or 7% of its workforce. Moreover, management has raised Oxford’s cost-cutting target from the £6m originally forecast to £8m this year. 

Growth at a reasonable price 

Oxford had warned the market in January that its full-year results would miss expectations, but the market seems to have ignored the warning. 

After falling by as much as a third in one day after issuing a profit warning at the end of January, Oxford’s shares have rallied by 44% during the past five months. The company’s shares are currently trading at a historic P/E of 20.4 based on today’s results. 

But City analysts are upbeat about the company’s prospects. Indeed, City figures suggest that the company’s earnings per share will jump by 21% this year. According to these numbers, Oxford is currently trading at a forward P/E of 18.6 and a PEG of 0.9 — a PEG ratio of less than one signifies growth at a reasonable price. 

Spill over effects 

Oxford’s troubles could be a sign of wider industry pressures, which would be bad news for Premier Farnell (LSE: PFL) and Imagination Technologies (LSE: IMG)

That said, both Premier and Imagination already have their own fair share of problems. 

For example, Premier’s profits have now been sliding for three years straight. The company is struggling to cut costs fast enough to maintain profit margins. 

Earlier this year the group’s management announced that it was increasing its annualised cost saving target to £10m-£12m, compared to the previous target of £6m-£8m. 

Premier is currently trading at a forward P/E of 13.2 and supports a dividend yield of 5.3%. The payout is covered 1.3 times by earnings per share. 

Disappointing 

After issuing multiple profit warnings over the past few years, Imagination’s shares have slumped a staggering 70% from their 2012 high of 700p. 

That said, the company has recently been the subject of takeover rumours, with Apple being quoted as a potential suitor. Apple already owns around 10% of Imagination, and sales to Apple account for a third of Imagination’s sales. 

Nevertheless, as a standalone company, Imagination is hardly a top pick in my opinion.

City figures suggest that the company is trading at a forward P/E of 38 and earnings per share for the year to the end of April 2015 are set to fall 27%. Earnings are set to rebound by 34% to 7.9p during 2016, but this is still far off the peak of 10.10p per share reported for fiscal 2012. 

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

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