Buying shares in companies which have announced disappointing updates can be a risky business. It is normal for their shares to come under pressure in the short run, as investors price in their changed outlooks. However, in the long run they can offer turnaround potential in some cases.
Reporting on Wednesday, however, were two shares which may be worth selling at the present time. Although they have the capacity to deliver turnarounds after worse than expected periods, there may be better risk/reward opportunities available elsewhere.
Tough period
Falling by 13% on Wednesday was systems integrator and managed services provider Maintel (LSE: MAI). It had expected to recover the reduction in gross margin reported in the first half of the year, but its year-end trading update confirmed that this would not be possible. One reason for this is the migration of two legacy contracts following the acquisition of Azzurri Communications. They were higher margin contracts than the company’s other contracts, and their loss is set to mean lower revenue than anticipated.
There have also been delays to customer installations which have affected the company’s Managed Services and Technology performance. This follows the Avaya Chapter 11 process, although ordering activity from Avaya is expected to start to recover in the near term. In addition, the integration of Intrinsic Technology has been as expected. However, gross margins from the business have been lower than anticipated.
Looking ahead, it would be unsurprising for investor sentiment in Maintel to weaken somewhat. Its recent acquisitions have been rather mixed in terms of delivering financial performance as expected. Therefore, while it may be capable of a turnaround in the long run, it could be a stock to avoid or sell in the near term.
Disappointing update
Also releasing a disappointing update on Wednesday was niche manufacturer Plastics Capital (LSE: PLA). Although the company reported growth across its divisions in the first six months of the year, recent delays in the ramp-up of two significant bearings projects have meant that its pre-tax profit for the full year is now set to be below consensus market expectations. This caused the company’s share price to decline by around 3% following the update.
Clearly, the company’s full-year performance is set to be well ahead of the previous year. In the first half of the year, organic revenue growth was an impressive 13.5%, while it continues to invest in development and capacity expansion projects. They could help it to deliver sustainable growth, while project wins show that it is capable of continuing to generate high sales growth. Furthermore, its equity placing of £3.54m could provide additional capital through which to invest for future growth.
With Plastics Capital trading on a price-to-earnings (P/E) ratio of around 10.5, it seems to offer good value for money at the present time. However, with its performance being worse than expected, it seems prudent to await more positive updates before buying it.
