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Should You Buy Or Sell Dialight Plc After Falling By A Third Today?

Shares in industrial lighting manufacturer Dialight (LSE: DIA) collapsed when markets opened this morning, falling by more than 35% to under 500p.

The cause of the fall was a new profit warning, which the firm says was caused by a sudden slowdown in orders during the second quarter.

Dialight now believes that “underlying operating profit for 2015 will be significantly below expectations”. The group also announced that its newly appointed chief executive, Michael Sutsko, will carry out a full strategic review of the business.

Bad news, for sure, but should it be enough to wipe out a third of the company’s value?

Caught by surprise

I think the problem here was that investors were caught by surprise.

The firm’s last trading update was at the time of its AGM in April, less than two months ago. At the time, Dialight said that revenue growth for the first quarter of the year “exceeded expectations”.

Dialight indicated that a business review by the firm’s interim chief executive had found inefficiencies in the firm’s production operations, but no other problems were identified.

What’s changed?

Dialight claims that since April it has experienced a sudden slowdown in orders for its industrial lighting products. This might well be true, but I think the biggest change between April and June was the appointment of a new chief executive.

I suspect that new CEO Mr Sutsko, who started work on 1 June, has found that the real situation is worse than the firm’s previous management was admitting.

Mr Sutsko may also have decided to do a ‘kitchen sink’ update. By getting all the bad news out at the start of his tenure, he should improve his chances of delivering growth and a rising share price from now on.

Does this mean that Dialight shares are now cheap enough to buy?

Not so fast…

Dialight shares peaked at 1,388p in 2013. They haven’t traded below 500p since 2010.

Although Dialight’s sales have risen by 60% since 2010, I’m not convinced the shares are cheap enough to buy.

Back in 2010, Dialight shares traded on a P/E of more than 20, thanks to its growth status. Dialight definitely doesn’t qualify as a growth buy today.

We also need to consider that this year’s results will be lower than last year’s.

It’s too early for any revised broker forecasts, but the firm said this morning that full-year profits will be “significantly” below expectations, and that first-half profits will be lower than last year.

On this basis, I’ve estimated full-year earnings per share (eps) by knocking 10% off last year’s underlying eps figure. That gives a revised 2015 earnings forecast of 33p per share.

The current share price of 480p thus gives a forecast P/E of 14.5. This seems high enough, as Dialight appears to have other problems. The firm’s operating margin has fallen from 17% in 2012 to less than 10% in 2014. Net cash has fallen by almost half during the same time. I suspect a dividend cut is now likely.

I’d avoid Dialight for the time being, and would be tempted to sell if I was a shareholder. The outlook seems too uncertain at present.

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Roland Head 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.