Troubled temporary power providerAggreko(LSE: AGK) is falling today after the company issued a disastrous trading update and warned on profit.
Aggrekos business has been hit by a number of factors over the past year, includingweakening demand from the US shale industry and fighting in Yemen. Whats more, Aggreko is in the final stages of renewing contracts to provide 325 megawatts of gas plants in Bangladesh, but warned today that the terms for these contracts will now be worse than expected.
As a result of all these factors, Aggrekos management expects pre-tax profit for the year to fall between 250m and 270m. This estimate excludes the effect of exchange rates, which have moved adversely in recent months.Analysts were expecting the company to report a pre-tax profit for the year of 293m.
Latest warning
Todays depressing trading update is the second such warning from Aggreko this year. Back in March, Aggreko told investors that pre-tax profits for 2014 fell 13% year-on-yearbecause of a mining industry slowdown in Australia.
And it doesnt look as if things are going to get any better for Aggreko any time soon.
Falling commodity prices are pressuring miners to slashcapital spending at a record rate, and US shale producers are facing mounting pressure as the price of oil remains stubbornly low.
Indeed, alongside todays trading statement Aggrekos management actually hinted that there could befurtherpain to come for the company in the near future. The company warned that:
we have seen a further slowdown in North America with volumes in the shale basins continuing to decline. More recently, we have begun to see an impact on our offshore oil and gas business in the Gulf of Mexico.
With this being the case, I wouldnt rule out another profit warning later in the year.
High expectations
Aggrekos fall grace over the past three years has caught many of the companys supporters by surprise. Rising costs and operational issues have squeezedAggrekos profit margins since 2012 and, while revenue has remained steady, earnings per share have declined around 22%.
Unfortunately, Aggreko has always traded at a premium valuation, which didnt leave much room for error. Specifically, during the past five years Aggreko has traded at an average forward P/E of around 20.
And as the company has failed to live up to expectations, its shares have plummeted. Since hitting a high of 2,500p per share during 2012, Aggrekos shares have slumped by 50%.
There could be further declines to comeif the situation in the US deteriorates. Even after todays declines Aggreko still trades at a forward P/E of 14, based on old forecasts.When City analysts have revised their numbers lower based on todays news, Aggrekos shares will only become more expensive.
All in all, for the time being as there could be more bad news on the way, investors should be cautious around thetemporary power provider.
The bottom line
Aggreko has failed to live up to the market’s lofty expectations for growth. And for this reason, the market has turned its bank on the company.
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Rupert Hargreaves 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.