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Should you pile into small-cap stock Carpetright plc after 30% crash?

In January, my colleague Peter Stephens told us he’d still sell Carpetright (LSE: CPR), even after the share price had plunged by 40% after the flooring supplier issued a profit warning.

It turns out that was a canny decision, as Thursday brought another warning — and a further 30% share price slump during morning trading. As I write, the price has recovered a little to 58p, but is still 25% down on the day. And down 90% since a peak of more than 600p in June 2015.

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Trading conditions “have remained difficult, characterised by continued weak consumer confidence,” which really shouldn’t come as any surprise. As a result, Carpetright’s UK like-for-like sales are still falling (though at a softening pace), and remain below the firm’s expectations.

The bottom line is that we should now expect an underlying pre-tax loss for the year to April.

Bankers

That has inevitable liquidity and balance sheet implications, and the company is talking to its bankers to ensure it doesn’t break the terms of its borrowing facilities. At the same time, there’s an effort being made to work out how to strengthen the balance sheet, though at this stage there are no further details.

The City had already been predicting a 75% fall in EPS this year and a modest pre-tax profit, though forecasts for the next two years would see earnings recovering by approximately 50% each year to bring the P/E down to seven by 2020.

That’s meaningless now, and the optimism seems misplaced at the moment. 

It’s possible that Carpetright might be at the point of maximum pessimism right now and that buying would be a smart move. But with discretionary spending tight and the retail sector hurting, and with other safer stocks on offer, I see no need to take the risk.

Biggest fall

The biggest nominal fall on Thursday saw industrial software specialist Aveva Group (LSE: AVV) shares apparently losing more than a third of their value.

It’s due to its readmission to the market after the completion of a reverse takeover with the software arm of Schneider Electric of France. The readmission includes Aveva’s original 64m shares, plus 97.2m new shares issued to Schneider as part of the deal. But what are we to make of the new beast?

Aveva’s shares had stormed ahead over the past two years, gaining 130% by the end of January 2018, presumably in expectations of the firm’s earlier growth pattern resuming after a break of a couple of years. And that might indeed be on the cards, after a brief update on 15 February (following Schneider’s 2017 results) told us that the two companies’ joint assets “experienced continued growth in [their] Licencing and Maintenance revenue streams, partly offset by a slight decline in Services revenue.

More sensible valuation?

One problem is that forecasts prior to Thursday put Aveva shares on a high fundamental valuation, with a forward P/E of nearly 40. That might be fine for a company with very strong earnings growth expectations, but single-digit EPS forecasts would have dropped that only as far as 34 by 2020.

The new Aveva makes those forecasts obsolete and we’ll need to wait for updated forecasts for the merged operation. We might have a more sensible valuation when it all works out, but I’d probably want to wait for a full year of results following the merger.

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Alan Oscroft has no position in any of the 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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