Shares in technology company Laird (LSE: LRD) have fallen by as much as 50% today after it announced a profit warning. Should investors avoid it, or does Laird present a buying opportunity for the long term?
Laird experienced a disappointing first half of the year and was expected to record a significant improvement in the second half of the year. However, its third quarter has been hugely challenging. The acceleration of production for mobile devices has come much later than in previous cycles and visibility remains poor. Laird has also experienced margin pressure as a result of unprecedented pricing issues and some operational factors.
The effect of this has been a very tough quarter and Laird has reduced guidance for the full year. It now expects underlying pre-tax profit to be around £50m. This would represent a fall of £23m from last year’s pre-tax profit of £73m.
Clearly, investors have reacted negatively to profit warning. However, the company is taking action to stabilise and boost its performance. It will focus on managing costs and improving cash flow. Laird expects year end net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) to be within covenant limits of 3.5 times.
Furthermore, Laird’s business outside of its Performance Materials division remains strong, with its Wireless Systems division delivering a rise in sales of 58% in the quarter. It has also seen positive momentum in its automotive business, while trading in Novero remains consistent with previous guidance.
Laird’s disappointing three months is due to external factors rather than a failure by the company itself. The smartphone market has been under pressure of late, with Apple reporting a 15% drop in sales of its smartphones in the most recent quarter. Similarly, Samsung has endured a tough period as product recalls are likely to have affected sales numbers.
As such, Laird remains a sound business and its strategy to become more efficient and streamlined could lead to an improved business model over the medium-to-long term. However, in the short run things could get worse before they get better. The smartphone market remains highly uncertain and while Laird may be able to meet updated guidance, there can be no guarantee that this will be the only reduction in guidance before the end of the year. This means that Laird’s share price could fall further.
However, in the long run the smartphone market is likely to grow. Demand from emerging markets should pick up as GDP per capita increases in the coming years. Therefore, Laird continues to offer sound long-term growth potential and could recover the lost ground in the aftermath of today’s profit warning. Buying now would be risky since Laird’s shares are likely to be highly volatile. But the potential rewards are also high, which makes it appealing for investors who are able to take a long-term view.
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Peter Stephens owns shares of Laird. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on 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.