Two of todays biggest fallers are Dialight (LSE: DIA) and Alton Towers owner Merlin Entertainments (LSE: MERL).
Ive been taking a look at the news behind todays falls and whether they represent a good buying opportunity for investors.
Merlins problem
Shares in Merlin Entertainments fell this morning after the firm admitted that Junes Alton Towers roller-coaster crash would have a serious impact on profits. Earnings before interest, tax, depreciation and amortisation (EBITDA) for the key summer period are now expected to be 40-50m, compared to 87m in 2014.
Merlin shares dropped 8% to a low of 385p when the market opened this morning and are currently trading at about 405p, 14% lower than before Junes crash.
Is this the bottom?
Merlin says it is now taking action to rebuild momentum and re-engage with our customers.
The group doesnt say how badly visitor numbers have been affected, but did warn that there may be some continued adverse impact on profits in 2016. This suggests to me that Merlin is facing a serious struggle to attract visitors back to Alton Towers and other UK theme parks.
Merlin shares now trade on 21 times 2015 forecast earnings per share. I expect these forecasts to be downgraded after todays profit warning. Merlin shares look expensive to me, especially as there could be more bad news on profits later this year. I personally rate the group as a sell.
Dialight
Shares in LED lighting specialist Dialight have fallen by 45% over the last year, thanks to a succession of profit warnings. Todays interim results announcement has sent the stock down by another 5%, to 518p.
Underlying earnings per share fell by 63% to 5.4p during the first half. This suggests that consensus forecasts for earnings per share of 31p in 2015 will now be cut hard. In my view, 15p per share seems more realistic.
Why?
Dialight has been hit hard by the downturn in the oil and gas sector, but after looking at todays interim results, I think there may be a more fundamental problem.
The groups profit margins seem to be collapsing. Despite strong sales growth from the groups flagship lighting division during the first half, operating profit plummeted:
Lighting sales |
Lighting operating profit |
Lighting operating margin |
|
H1 2014 |
43m |
7.1m |
16.5% |
H1 2015 |
53.4m (+24%) |
3.5m (-51%) |
6.6% |
This collapse was reflected in Dialights group results. The firms underlying operating margin fell from 9.2% during the first half of 2014 to just 2.1% during the first half of the current year.
Dialights management says that operational inefficiencies in its main factory in Mexico have caused excess costs during the first half of the current year. The firm has relocated a number of staff to Mexico to solve these problems, but doesnt explain what they are or why they are so severe.
In my view, its possible that the group is also suffering from a loss of pricing power. This could be due to cost-cutting in the oil and gas industry and, more widely, to increased competition as LED lighting becomes more mainstream.
Well have to wait until October to learn the outcome of Dialights strategic review, but I dont think there is any rush to buy the firms shares. Even assuming that earnings start to recover over the next six months, the shares still look expensive to me.
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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.