Essentra (LSE: ESNT), the makerand distributor of vital component parts, has reported a challenging update thathas sent its shares plummeting. Clearly, this is hugely disappointing for the companys investors, although parts of the businesscontinue to perform well. Therefore, could it be the right time to buyEssentra, or is it best to avoid it?
Trading in itsComponent Solutions division has been in line with expectations for the 2016 financial year. Growth in Continental Europe and Asia has remained strong, with recently-implemented initiatives in the UK and US delivering early signs of slowing the sales declines that were a feature of H1.
However, thePipe Protection Technologies segment has experienced a tough year. Although the Extrusion business has benefitted from new contract wins and a greater focus on higher value-added technical profiles in attractive growth sectors, trading remains subdued overall.
Similarly, the Health & Personal Care Packaging division has experienced a disappointing year. Despite thethree facilities in the US and UK thatpreviouslyexperienced integration issues having performed at improved levels in the second half of the year, it has been below expectations.
In addition, the companys Filtration Products division has failed to win new contracts at the rate thatwas previously anticipated. Its performance in 2016 is now expected to be below previous expectations. In fact, the outlook for 2016 is now for a like-for-like (LFL) revenue decline in line with the first half out-turn of 7%. This compares with previous guidance of a mid-single digit decrease, with adjusted operating profit now expected to be in the range of 137m to 142m, versus previous guidance of 155m to 165m.
Tough times in the sector
Clearly, Essentra is enduring a difficult period and it would be unsurprising for its shares to fall further. Theres also the potential for further downgrades asits divisions may experience further weakness in their operating environments.
Of course, Essentra isnt the only support services company thathas seena profit warning and share price fall this year. Sector peer Capita (LSE: CPI) has fallen by 40% since its profit warning in September, with the companys shares now having a price-to-earnings (P/E) ratio of only 8.7. This indicates that theres significant upward rerating potential on offer, especially since Capita is forecast to return to growth next year. Its bottom line is expected to rise by 3%, which shows that it may prove to be an excellent opportunity to buy ahead of a turnaround.
However, with Essentras outlook being relatively downbeat and highly uncertain, it may be prudent to await evidence of an improved performance before buying in. The companys P/E ratio of 8.3 has appeal, but could move lower if the trend of 2016 continues into 2017. As such, Capita seems to be the better buy of the two support services companies for now.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Essentra. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.