After issuing a sales warning in October the share price of medical products maker ConvaTec (LSE: CTEC) has dropped down to under the 240p IPO price at 190p. With the shares are now trading at 15 times forward earnings so should investors take this as an opportunity to snag the stock at a possibly bargain price?
For now, I would urge caution. In the trading update management said supply issues and lower than expected sales of some new products would lead to organic revenue growth slowing to 1%-2% for the year to December. Unsurprisingly, disruptions from supply chain problems will also have an effect on the company’s margin improvement programme, although there was no firm guidance as to profit for the year.
For next year though, management said that “we are reviewing the financial implications for growth and margins in FY2018.” With management still not certain on the outlook for next year, I can’t say I’m tempted to buy ConvaTec shares at this point in time.
Even if supply chain problems are sorted out in a timely manner, I’d still be cautious around the company. Its saddled with net debt piled on by its former private equity owners that at the end of June was a full three times adjusted EBITDA. This severely constrains the ability to go out and make deals or return gobs of cash to shareholders.
And with competitive pressures rising in the ostomy market, which accounted for 30% of sales in H1, some analysts are expecting the firm’s margin improvement targets to be postponed or delayed. All told, with the effects of slowing sales not yet fully clear and competitive pressures increasing, I’d steer clear of ConvaTec at this point in time.
Share price on a roller coaster
Theme park operator Merlin Entertainments (LSE: MARL) has also seen its share price plummet in recent weeks as the company’s trading update covering the peak summer months showed distressingly low revenue growth and led to management downgrading profit growth expectations for the full year.
Management laid the blame squarely at the feet of unfavourable weather and terrorism, which they say caused crowds to stay away from its Central London properties such as Madam Tussauds and the London Aquarium.
While it’s not farfetched to blame external events for the 1% drop in like-for-like (LFL) sales from its London-centric Midway attractions, I find this argument less convincing when it comes to explaining the 2.1% fall in LFL revenue from the group’s theme parks division. This includes non-London attractions such as Alton Towers and Thorpe Park and should have benefitted from the record numbers of international tourists who visited the UK and who didn’t visit Central London and Merlin’s properties there.
Either way, the result was the same with management guiding for LFL revenue staying flat year-on-year in 2017 and the firm deciding to shift capital investments away from its existing estate and into expanding accommodation offerings and opening up new properties. Obscured in all of this is the very good performance from the company’s Legoland Parks, which saw a stellar 3.4% rise in LFL sales during the period and have significant rollout potential. While Merlin’s valuation has decreased to 18.4 times forward earnings, I still find this a steep price to pay for a cyclical and capital-intensive business.
