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Why Shares In ASOS plc Plunged Today

Online fashion retailerASOS(LSE: ASC) is falling once again today, after the companyissued its third profit warning in the space of a year.

ASOS now expectspre-tax profit for the year ending August 2015 to come in at a similar level to this year,around45m against previous expectations of 62m. For the three months to the end of August this year, ASOSs sales grew by just 15% year on year. UK sales expanded 33% but international sales rose by just 6%.

Furthermore, for the first time in 10years, ASOSs pre-tax profit is expected to fall this year. Pre-tax profit of 45m is expected, compared to 55m last year.

Unfortunately, the company has fallen victim to the strong pound, which has forced ASOS to slash prices within international markets to keep customers loyal.According to the retailer, a strong pound has hurt sales within markets such as Russia and Australia where prices, in sterling terms, have risen around 20% over a twelve month period.

A fire at the companysBarnsley warehouse also dented fourth-quarter sales by around 30m.

Commenting on todays trading statement,Nick Robertson, CEO, commented:

Our UK performance remained strong over the final quarter, with sales increasing 33%Engagement with our customers remains positive with a 25% growth in active customers and increases in order frequency, conversion rate and average basket valueWe remain focussed on the long term opportunity for ASOS, with 2.5bn of sales as our next staging post.

Boosting investmentASOS

To compete with local competitors and offer a better quality of service, ASOS is planning a significant international investment programme next year. The program aims to bolster the companyslogistical infrastructure and technology platform, in order to streamline the groups order processing.

Long term, this investment should boost ASOSs competitiveness and quality of service, ultimately improving margins and profitability. However, long-term growth is going to come at the expense of short-term profitability. Nevertheless, with around 60% of ASOS sales now coming from international markets, the group needs to plan for the future.

Some good news

Still, there was some good news today, although the news was bittersweet. ASOS fourth quarter sales growth was actually better than some analysts had been predicting. That said, quarterly sales growth came at a cost to gross margins, as ASOS discounted products heavily in order to compete with peers such asBoohoo.com, which have been grabbing market share.

In the year to 31 August ASOSs gross margin declined by230 basis points, compared to the year ago period. Whats more, during the third quarter ASOSs gross margin contracted further, falling 640bps compared to the year ago period.

An expensive bet

At present levels, and even after recent declines, ASOS trades at a forward P/E of around 60, which seems expensive for ASOSs faltering growth.Theres no doubt that ASOSs lofty valuation may put some investors off.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Are SABMiller PLC Shareholders About To Get 4,600p A Share From Anheuser Busch Inbev SA?

Speculation is mounting about the price that BelgiumsAB InBevwill be willing to pay to tie the knot with SABMiller (LSE: SAB).Press reports and analysts suggest that SAB could receivea friendly approach that would value its equity at between 4,300p and 4,600p a share as early as today.

Its easy for me to bet on a price tag of at least 4,000p a share, butthere are a few reasons why you might do well to cash in today and invest proceeds elsewhere.

Reaction

SABs stock price has risen over 3% today as a bid from it rival could be imminent.SAB said on 16 September that there can be no certainty that an offer will be made or as to the terms on which any offer might be made.

Shareholders are strongly advised to retain their shares and to take no action, it added.Less than two week later, SAB now trades around the intra-day, 52-week high record that it hit on 16 September.

Risks

A year ago, I argued thatSAB was the most obvious takeover target in the beer industry, whileAB InBev was the most obvious acquirer. Options are thin on the ground, so I reiterate that view but I do not think a deal will happen at any price.

Equally important, we should consider the financing mix of any bid.

SABs undisturbed share price is about 3,000p. The obvious risk is that the parties will not manage to agree a deal priced over at 4,000p, and then youll have to forego a very nice capital gain given that its current equity valuation is 3,700p some 23% above the level that it recorded on 15 September.

AB InBev became the largest brewer in the world, surpassing SAB, when InBev acquired Anheuser-Busch of the US for about $52bn in 2008. A premium of 27% was paid over the record high that AB had recorded in October 2002.

Based on this element alone,a price tag of up to 4,600p seems about right, even though the net present value of synergies suggests a fair take-out price lower than4,000p, according to my calculations.

The interests of the seller and those of the buyer must be aligned, of course, but AB InBev really needs emerging market exposure, and it may bid up to secure the assets that it needs.So, say that a bid north of 4,000p will surely emerge.

Two Options

You have two options now: you forego any additional upside potential and take cash to get rid of your holdings right now.Alternatively, you have to be prepared to become a shareholder in AB InBev, betting on the chances of success for the combined entity, as well as taking some additional currency risk if you are a UK-based investor the deal, which could value SAB north of $100bn, will likely include a significant equity portion (my best guess would be up to 40% of the total value of the acquisition).

A source in the City recently commented:How could this possibly make it through antitrust? Will ABI just take the regulators on a wild bender?

Consider that whenAB InBev was created it flipped several assets to private equity and trade buyers to preserve its credit rating some of those assets were later bought back by the seller. Now, if the deal goes though this round of negotiation, I would expect disposals in North America, but it is hard to predict how regulators worldwide will react to the biggest takeover of a British firm. Divestment risk is another factor we should take into account.

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

This Is Why Sprue Aegis PLC Crashed By 45% Today

Shares in smoke alarm manufacturer Sprue Aegis (LSE: SPRP) fell by 45% to 142p this morning, after the AIM-listed firm issued a double profit warning.The firms guidance for both 2015 and 2016 profits has been cut, causing the shares to crash.

2015 profits hammered by claims

Sprue Aegis says that a quality issue has been found with the batteries fitted to some of its alarms. It seems that these batteries wontlast as long as they should. Most modern smoke alarms are sealed with a guaranteed lifespan. As a result, Sprue expects a surge of warranty claims triggered by low battery alarms sounding within the warranty period.

The firm said today that its increasing its provision for 2015 warranty claims by 5.5m to 6.8m, up from just 0.9m in 2014. As a result, the firms adjusted operating profit for 2015 is expected to be 7.3m, down from previous guidance of 12.1m.

My estimates suggest that this could result in 2015 earnings of about 13p per share, down from previous forecasts of 22.6p per share. If Im right, then todays fall leaves Sprue trading on a 2015 forecast P/E of about 11.

If 2016 trading was going well, then this might have been a good buying opportunity. Unfortunately, 2016 is shaping up to be a bad year for Sprue Aegis.

2016 looks grim

Although it handtyet published its 2015 results, todays trading statement covered the first quarter of 2016.Sales have fallen significantly below expectations in France and Germany. French sales surged last year, after a change to the law required all homes to have at least one smoke alarm. However, French retailers now appear to have been left with surplus stock they cantshift.

In Germany, the firm says that product certification delays on new models are responsible for weaker sales and these two factors are expected to result in Sprue Aegis reporting an operating loss of 1.9m for the first half of 2016.

Although the group expects to return to profit during the second half of this year, full-year sales are now expected to be just 55m, down by 22% from previous broker forecasts of 70m. Full-year operating profit is expected to be just 1.9m, down from 7.3m in 2015.

Is Sprue a recovery buy?

Sprue Aegis said today that it still plans to pay a final dividend for the year ending 2015. However, the dividend outlook for 2016 seems very uncertain to me. I suspect the payout will be cut or cancelled.

Despite this gloomy outlook, its worth remembering that Sprue ended 2015withnet cash of 22.4m. It has historically been a well-run company and two of the firms directors Chairman Graham Whitworth and Managing Director Nicholas Rutter are major shareholders, with a combined 13.8% of the shares.

Sprue doesnt seem to be in any danger of financial distress. Most of the problems announced today sound to me like one-off issues thatshould be resolved within 12 months.I think Sprue could be a good recovery buy at some point, but I think it would be wise to wait and see if things really do improve later this year before deciding whether to invest.

In the meantime, I believe there are much better growth opportunities elsewhere in today’s market.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Will Greek Election Spell The End Of The Euro?

So the unthinkable has happened and the Greek people have chosen to tell their German euro-masters where they can stick their austerity measures!

But could this be the first domino to fall in a cascade that will bring down the euro? For the sake of the long-term future of Europe, I do hope so.

Europe good

Dont get me wrong Im an ardent europhile. But my enthusiasm is for an association of sovereign states with open borders to goods, services and people; but with members able to work their own economic levers as they see fit and in accordance with their own economic needs, rather than having things dictated by Brussels for the benefit of Germany and France.

Had Greece left the euro in the first place, there would certainly have been some years of pain. But a New Drachma would have been free to devalue, making Greek exports look considerably more attractive having goods priced in euros in an economy that cant compete with the efficiencies of Germany and France was always going to be a recipe for years of stagnation.

Greece would have seen high inflation and corresponding high interest rates had it left, but there would have been light at the end of the tunnel. As it stands today, Greece is suffering the pain but is still in the dark.

Syriza victory

The anti-austerity Syriza party has won Sundays election and has formed a coalition with the right-wing Greek Independents party, giving the new government a comfortable majority. The countrys new leader, Alexis Tsipras, is now set to renegotiate Greeces bailout with a view to ending the humiliation and pain.

Speaking to the BBC, the likely incoming finance minister Yanis Varoufakis described the terms of the German-led bailout as fiscal waterboarding policies that have turned Greece into a debt colony. Thems fighting words.

Talking heads across the eurozone are already urging Greece to stick to the terms of its bailout, though many are conceding that there might be room for some flexibility. But Germany, the nation really calling the shots, has indicated that it will not countenance any renegotiation.

Confrontation

The incoming Greek government has said it wants to remain in the euro, but its stated policy is clearly contrary to the current rules of the union. And although MrTsipras has said that There will neither be a catastrophic clash nor will continued kowtowing be accepted, theres clearly a confrontation coming, and it could be messy.

To the Greek electorate I say Bravo, for voting to regain your own sovereignty. And if your actions help hasten the end of the ill-conceived economic experiment that is the euro, then many more in years to come will surely be thanking you.

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Ultra Electronics Holdings plc Buys Division Of Kratos Defense & Security Solutions, Inc For $265 Million

Ultra Electronics Holdings (LSE: ULE), a mid-cap defence and aerospace company, announced today that it has agreed to acquire the Electronics Products Division (EPD) of Kratos Defense & Security Solutions for up to $265 million. The acquisition would strengthen the companys presence in the electronic warfare market, which is fast-growing despite recent defence spending cuts.

Electronic warfare and emergent technologies

EPD uses microwave and radio frequency technology for use in electronic warfare, radar and communication, missile and flight simulation applications. The business already supplies its proprietary technology to the Trident II D5 missile, F-16 Fighting Falcon, Eurofighter and the AMRAAM missile programmes. EPD had EBITDA (earnings before interest, tax, depreciation and amortisation) of $22 million and pre-tax profits of $11 million in 2014; which makes the acquisition seem on the more expensive side.

However,this reflects the growth prospects of the business. Ultra expects to benefit from substantial cost savings of around $8 million annually following the merger,andhopes to gain market share by increasing its technical capability and expanding its product range.

Although the outlook for the defence sector remains pessimistic with reduced defence spending, investments in emergent technologies are likely to remain prioritised. Ultra expects the electronic warfare market in the US will grow by 3% annually in the medium term. The company is also targeting other emergent technologies, including cryptosecurity, sonar-based submarine detection, mine detection and surveillance systems. Ultra made five acquisitions in 2014, costing a total of 107.5 million, which is more than four times what it had spent in 2013.

The market reacted positively to news of the acquisition

Ultras success in integrating acquisitions in the past gives us confidence that it can do the same with EPD. Its focus on bolt-on acquisitions, which have been smaller in scale and operate within similar markets, has made it easier to realise cost synergies and integrate them within the company. Acquisitions in the past have allowed the company to diversify away from the defence, allowing it to grow its exposure to cyber security, commercial aerospace, transport and energy markets.

Acquisitions is not the only growth strategyfor the company, as it commits about 5% of its revenues on research and development. However, reduced traditional defence spending and the termination of its Oman Airport IT contract will still cause a short term disruption to its earnings growth trajectory. In the longer run, growth in commercial aerospace, security and prioritised defence markets should help the company to overcome these short term difficulties.

Reflecting the markets confidence of the move, shares in Ultra rose by 2.6% to 1,880p by early afternoon. Ultra has a forward dividend yield of 2.5%. Its shares are currently trading at a forward P/E ratio of 15.5, which is slightly more expensive than its defence peers. But, Ultras greater focus on priority defence markets means that its premium valuation is well deserved.

More investmentideas…

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Femi Ogunshakin Managing Director
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