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Is Carr’s Group plc a falling knife to catch after dropping 20% today?

Shares of agricultural feed and engineering company Carr’s Group (LSE: CARR) fell by 20% this morning, after the firm warned that full-year profits will be “significantly below” expectations.

Should this be a surprise?

Today’s profit warning was blamed on two problems, neither of which was a complete surprise.

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In January, Carr’s warned of a “significant contract delay in the UK manufacturing business”. The firm said it was cutting costs and looking for short-term work to offset the impact of this delay. Unfortunately this hasn’t been possible, mainly because of low order levels from the oil and gas market.

The second problem is with Carr’s agricultural feed business in the US. Again, the company warned in January that “volumes and margins are expected to remain under pressure”. In today’s update, we learn that “recovery in that market is now expected to be slower than anticipated”. This is expected to reduce profits in the short-medium term.

In both cases, these risks were clear in January, but the market gave management the benefit of the doubt. That may have been a mistake, but the question for investors today is whether they should buy, hold or sell Carr’s.

Is there worse to come?

Unfortunately, Carr’s management didn’t provide any specific guidance on profit today. My reading of “significantly below” suggests that earnings could be as much as 20% below expectations.

If that’s the case, then Carr’s could report earnings of 8.6p per share for the current year, putting the stock on a forecast P/E of 14.4 with a prospective yield of 3.2%. That’s an attractive valuation, especially as the current share price of 124p is backed by Carr’s book value of 120p per share.

The group’s engineering business could pick up rapidly if the oil and gas market recovery continues. The risk is that management have already been shown to be too optimistic once this year. There’s a real risk that another profit warning could follow.

Carr’s is going onto my watch list, but I’m going to wait for the firm’s interim accounts on 12 April so that I can review the situation in more detail.

What about rivals?

Carr’s mix of engineering and agricultural feed businesses exposes it to several different market sectors. This makes it hard to compare with other firms. But one way to view Carr’s might be as a much smaller version of FTSE 100 conglomerate Associated British Foods (LSE: ABF).

Like Carr’s, ABF stock has lost 20% of its value over the last twelve months. The group — which owns grocery, ingredient and sugar businesses, as well as budget fashion retailer Primark — has faced difficult market conditions. However, trading does seem to be improving.

Analysts expect ABF’s adjusted earnings to rise by 15% to 119.5p per share this year. The dividend is expected to rise by 11% to 40.9p per share. These figures put ABF stock on a forecast P/E of 22, with a prospective yield of 1.5%.

Although I do think that ABF is a good business, I’m not sure that it’s worth paying this much for the shares. I’d hold for now.

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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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