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Is this FTSE 100 stock on the brink of issuing a profit warning?

Today, I’m looking at a FTSE 100 company whose news flow over the last month could signal trouble ahead. I’m also looking at a beleaguered smaller company whose turnaround plan is on course, according to its half-year results released this morning.

Wise to ditch Sage?

Accounting software giant Sage (LSE: SGE) completed its transition to a subscription-based model last year. And having also launched a comprehensive suite of cloud solutions, it said it was looking forward to accelerating momentum in 2018, and beyond. However in April, it downgraded its organic revenue growth guidance for fiscal 2018 to “around 7%” from a previous “around 8%.”

There have been three items of news over the last month that I view as important:

2 August. A Q3 trading update, showing an acceleration of organic revenue growth to 6.8%, from 6.3% in Q1 and Q2. However, a far more demanding step-up to over 8% in Q4 is required to meet the full-year guidance.

20 August. A research note from Deutsche Bank, with some quite compelling evidence that competitors are gaining share from Sage on lower pricing and superior functionality.

31 August. Directorate change: “The Board and Stephen Kelly, chief executive officer, have come to an agreement and Stephen has stepped down as a director and CEO.”

These things individually would be somewhat of a concern, but the combination of all three has me seriously reconsidering the investment case. In the near-term, I see a risk of a profit warning, because meeting full-year guidance is dependent on “closing a number of Enterprise Management opportunities in September.” More importantly, I believe the company’s longer-term targets of annual 10% organic revenue growth, and organic operating margins of at least 27%, will very likely have to be lowered.

In my view, a current rating of 18 times forecast earnings overvalues a much less bubbly outlook for the business. As such, I rate the stock a ‘sell’.

Shocking year

AIM-listed Internet of Things firm Telit Communications (LSE: TCM) was in the news for all the wrong reasons last year. The company’s profits collapsed. Also, its founder and chief executive Oozi Cats was exposed as Uzi Katz, who had fled fraud charges in the US in his earlier years.

Before all this, I’d warned readers of signs of aggressive accounting at Telit, notably, high and rapidly- increasing capitalised development costs. These flattered earnings, while the company delivered little, if any, free cash flow.

Telit as it is

Finance director Yosi Fait, who stepped into the shoes of the disgraced and departed Cats/Katz, impaired $8.4m of these capitalised development assets last year. Today’s interim results revealed a further impairment of $2.4m. However, at the same time, fresh costs of $13.7m were capitalised.

Despite what I consider a still-high level of capitalisation under Fait, Telit booked a net loss for the period of $11.9m, on 13.7% higher revenue. However, it reckons a stabilisation of gross margins, and cost optimisation, will improve performance going forward. It also expects to complete the sale of its automotive division by the end of 2018, which would strengthen its balance sheet.

Telit remains the subject of a Financial Conduct Authority investigation, as well as being embroiled in tax and civil litigation in Italy. There were no updates on these matters in today’s results. And with the accounts also failing to impress me, I continue to rate the stock a ‘sell’.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.