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The IQE share price is falling. Should you be buying?

The share price of electronics firm IQE (LSE: IQE) has fallen by 45% from its 52-week high of 181p. Today I’m asking why the shares are falling, and if this is a buying opportunity for smart investors.

I’ll come back to IQE in a moment, but first I want to take a closer look at the latest figures from £780m geotechnical engineering contractor Keller Group (LSE: KLR).

This FTSE 250 firm is a high-end groundworks specialist. Past projects include work on the London Crossrail project. When tunnels were bored under important historic buildings, Keller’s “compensation grouting” ensured that the surface of the ground moved by no more than 1mm. Keller is also involved in large-scale projects such as oil refineries, skyscrapers and dams.

Today’s half-year results suggest that demand for the group’s services remains strong. Underlying pre-tax profit rose by 7% to £42.2m. Underlying earnings rose by 24% to 41p per share. The firm’s legendary dividend growth continues — the interim payout will rise by 24% to 12p per share.

What could go wrong?

Keller is one of the market leaders in its field and operates globally. Although it is a cyclical business, today’s results showed profits that are stable or improving in all regions.

The company says that full-year results are expected to be in line with expectations. Based on the latest analyst forecasts, this puts the stock on a forecast P/E of 11, with a prospective yield of 3.3%. I continue to rate the shares as a buy.

A tech growth story

Semiconductor wafer specialist IQE plans to double the number of reactors qualified for photonics in its Newport factory from five to 10 this year. The company plans to have built 20 “fully serviced reactor bays” by the middle of 2019, with more planned beyond that.

Photonics (devices that emit or detect light, such as lasers) are the most rapidly growing part of the firm’s business. In its latest trading update, the company says that sales of these products rose by 30% during the first half, excluding exchange rate effects.

Alongside this, the company’s more mature Wireless business continues to sell large volumes of compound semiconductor products, which are required for high-speed wireless services.

IQE said last week that it expects to report half-year sales of £73m, up from £70m for the same period last year. However, this figure was affected by a 9.5% currency headwind. I estimate that sales at constant exchange rates would have risen by about 14% to £80m.

On track for growth targets?

Sales are expected to be 50% higher during the second half of the year than during H1. This puts the group on track to hit full-year forecasts of about £180m. The Cardiff-based firm says that the heavy second-half weighting is due to the time needed to replenish inventories of certain components after rapid photonics growth last year.

I can see no reason to doubt this guidance, but in my view there’s always some risk of disappointment when sales growth is ‘lumpy’ in this way. Despite this year’s share price drop, IQE stock still trades on a 2018 forecast price/earnings ratio of 28. This drops to a forecast P/E of 19 for 2019. This looks high enough to me, so I wouldn’t buy the stock at this level.

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Roland Head owns shares of Keller Group. 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.