Replacement doors and windows group Safestyle UK (LSE: SFE) issued a big profit warning this morning, sending the shares down by almost 30% in the opening hour of trading.
It’s the group’s second profit warning in two months and looks serious to me.
In an accompanying statement, Safestyle said that the group’s order intake has fallen faster than expected since July. As a result, management expects to see “a material impact on full year profits”.
Is there any good news?
However, there doesn’t seem to be any company-specific issues here. Safestyle is the market leader in its sector and has been highly profitable and cash generative over the last few years. It’s also worth noting that the company reported a net cash balance of £13.4m at the end of last year, with no debt. So it seems unlikely to experience financial distress.
The problem appears to be a reduction in consumer spending. According to the latest statistics from trade body FENSA, the company noted installations of replacement doors and windows fell by 18% in June and July, compared to last year.
As a result, full-year revenues are now expected to be flat on last year, while profits are expected to be significantly lower. This is a big setback, considering that analysts’ forecasts until today were showing profit growth of about 11% this year.
After today’s fall, I estimate that this stock trades on a P/E of perhaps 10. There was no word on the dividend in today’s news, but if it’s not cut it would offer a yield of 7%. However, I suspect the shares will get cheaper before they start to recover. I’d stay away for now.
Is this the next big profit warning?
Car dealership group Cambria Automobiles (LSE: CAMB) recently reported a 21.7% rise in underlying half-year profits. It appears to be well financed with strong free cash flow, and trades on a forecast P/E of just 7. So what’s the problem?
Cyclical stocks like this often look cheapest when they’re near the top of the market. These low P/E ratios are common when the profits are close to a peak, and the market is pricing in a downturn.
In my view, there are several reasons to be cautious about investing in car dealers. UK new car registrations fell by 2.4% during the first eight months of the year, and by 6.4% in August alone.
According to Cambria’s latest trading statement, the group’s own like-for-like new vehicle sales fell by a staggering 17.6% during the 11 months to 31 July. It seems clear to me that the market is weakening.
I believe that’s why most of the major car manufacturers have now rolled out scrappage and ‘deposit contribution’ offers. Essentially, these are just sales tools to encourage owners of older cars to trade up and buy a new car, rather than another used one. Their purpose is to boost volumes at the expense of lower profit margins.
Although car dealers make most of their profits on aftersales and used cars, if new car sales fall, the pipeline of future aftersales work will shrink. In my view, now is not the right time to put money into this sector, however cheap it might seem.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of Cambria Automobiles. The Motley Fool UK has recommended Safestyle UK. 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.