International waste-to-product businessShanks(LSE: SKS) is falling today after the company issued a profit warning.
The group warned that full-year results will now be around 15% below previous expectations due to poor trading at its Benelux solid waste business, where trading has continued to deteriorate. Specially, weak volumes of waste, in particular in theNetherlands construction and demolition sector have hit both the companys long and short-term outlook.
Nevertheless, the companys other markets remain robust. The underlying performance of Shanks three growth divisions, hazardous waste, organics and UK municipal, all traded in line with expectations during the six-month period to September.
Still, management remains upbeat and alongside todays warning issued a reassuring outlook, stating that the groupremains well placed to deliver profitable growth over the longer term. Additionally, Shanks continues to invest significantly in its hazardous waste disposal business and UK PFI infrastructure, which should translate into high quality earnings growth. Two bids for long-term organic contracts in Canada are also in the pipeline.
Commenting todays trading update,Peter Dilnot, Group Chief Executive, said:
The underlying performance of our three growth divisions remains robust but market conditions in our Benelux Solid Waste business have deteriorated further over the summer and will impact our performance. We remain confident that the decisive action we are taking will enable the Group to deliver a stronger second half. Overall, the Board now anticipates that the Groups full year results will be around 15% below managements previous expectations. Longer term, the Group remains well-placed to deliver profitable growth as a result of our investments in Hazardous Waste and in our UK PFI construction programmes, and to benefit from a market recovery in the Benelux.
Long-term outlook
Despite todays warning, Shanks long-term outlook is still relatively positive. Indeed, the group operates within a highly defensive industry as there will always be waste that needs to be disposed of correctly.
However, for this reason investors have been prepared to pay a premium to get their hands on the companys shares. For example, before todays profit warning, the company was trading at a forward P/E of 19.9, an expensive valuation for a slow-and-steady waste disposal company.
Unfortunately, even after todays declines and factor in a 15% reduction in predicted earnings per share, the company is still trading at a lofty forward P/E of 19.5. The company does offer an attractive dividend yield of 4% at present levels.
Buy, sell, or hold
So, what should you do following todays warning from Shanks? Well, even after falling by as much as 16% in early trade Shanks shares still look expensive, especially when taking into account the fact that the companys earnings are expected to fall this year.
But there are other opportunities out there. You see, the key when searching for growth stocks is looking under the radar. You want to get on board while the company is still an unknown quantity, that way you won’t need to pay a premium in order to benefit from the company’s growth.
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Rupert does not own shares in Shanks Group.
