Oh, my goodness! The market has certainly been spooked by todays full-year results report from medical products and technologies companyConvaTec Group (LSE: CTEC). The shares plunged more than 20% in early trading.
But has the move been over-done? Whats the panic about anyway? Lets take a closer look to see if the stocks worth buying now that its on sale.
A nasty habit
ConvaTec arrived on the stock market in the autumn of 2016 and has seemingly developed a nasty habit of issuing pre-winter profit warnings! One in October 2017 pulled the rug from under the share price and, blow me down, the company repeated the profit-warning trick last October, causing another downward lurchin the shares.
Todays sharp move lower means the current share price around 120p is more than 40% below the initial listing price back in 2016. For those buying at the time of the IPO, this hasnt been a good investment so far.
Yet the report today seemed encouraging to start with. Revenue in 2018 grew 3.8% year-on-year and earnings before interest and tax (EBIT) moved 8% higher. However, it doesnt take long for the negatives to appear. Adjusted EBIT dropped by 6%, which the firm explains, was because of higher investment in commercial activitiesand negative (product) mix,which more than offset any benefits from the increased revenue. The EBIT profit margin dropped to 23.4% from 25.9% the year before, suggesting the firms trading niche could be subject to erosion from competition or, perhaps, from weaker demand.
Then theres a sub-heading in the report:Actions to address strategy execution issues,which suggests the main challenges could be internal. In essence, the firm plans to throw money at the problem in order to restructure. Thats disappointing. I want my recently IPOd companies to be at tip-top efficiency with a proven business model, not arriving on the stock market floundering, trying to make the business work.
Refreshing honesty
Interim chief executive Rick Anderson is direct in the report.These are disappointing results,he said. It is clear that swift and strong action is required to address the failures in execution which have caused the Company to underperform.
I must say, I like this approach, which is so refreshing compared to some of the old flannel a lot of company directors spout out when they are trying to put a positive spin on a poor performance. A direct assessment like Andersons tells us exactly where we are and allows the share price to move where it needs to go, thus minimising the chances of a false market if things are interpreted too positively by investors.
The company is searching for a permanent chief executive to appoint, which could be positive. I like change at the top in businesses because it can usher in a period of renewed vigour and progress. I also like the sector, which is known for its defensive, cash-generating characteristics. Meanwhile, Convatec has a plan to invest and to sort out its execution issues. I think theres a reasonable chance that the worst of the bad news could be behind us. So Im tempted to hold my nose, block out the fear, and to dip my toe in the water by grabbing a fewof the shares.
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