Specialist printerXaar(LSE: XAR) is falling today after the company issued yet another profit warning.
Xaars share have fallen 21.5% at time of writing, after the company warned that revenue for the full year would now fall in the range of 115m to 125m.
What really surprised shareholders, however, was the timing of this warning. Indeed, only six weeks ago management issued a trading statement informing investors that the company was trading in line with forecasts. Unfortunately, this sudden warning implies that trading has suddenly deteriorated.
For the first six months of 2014, Xaar posted a pre-tax profit of 16.1m, down from 22.3m reported a year ago. Revenue fell 10.1%, to 60.4m, from 67.2m.
It seems as if Xaars troubles can be traced back to China. One of the companys key revenue streams isceramic tile decoration, demand for which has exploded during recent years, thanks in part to the Chinese property bubble.
However, now Chinas property market is starting to cool and competitors are stealing market share, eroding Xaars profits. According toIan Dinwoodie, Chief Executive:
During the third quarter, demand from the ceramic tile decoration sector has softened, which we believe relates to a slowdown in construction activity in ChinaOur market leading position in ceramic tiles has, as previously announced, attracted competition, which has negatively impacted pricing, but we have strengthened our offering with several new product launches.
Still, Xaars management team remains upbeat about the future, continuing to see room for growth within some of the companys other key markets.
Opportunities for growth
Aside from the poor performance within the ceramics division, Xaars management is excited about the prospects for the companys thin film programme. Thin film is expected to open up multiple additional markets for Xaar. Whats more, prospects for the companysDirect-to-Shape application have brightened.
As a sign of managements confidence in Xaars future, the interim dividend was hiked 20%, from 2.5p per share, to 3p per share.
Nevertheless, even after todays slump, Xaar still trades at a relatively high forward P/E of 14.9.With earnings slated to fall this year, Xaars current valuation looks to be over optimistic. I wouldnt rule out further falls in the companys share price, especially if trading deteriorates further.
This is the second profit warning that Xaar has issued this year, and as the saying goes, bad news usually comes in threes. Unfortunately, it looks as if it could be time to give up on Xaar.
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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.