Can battered Xaar ever recover?

Following two profits warnings in just a couple of months, we cautioned that "the rout may not be over" at ink-jet printer technology expert Xaar. Now, a month later, a third profits warning has smashed the share price again, and even management is struggling to sound optimistic.

Xaar warned on 28 August that demand for its products from the ceramic tile market had continued to soften during the third quarter, hit by a slowdown in construction activity in China, a huge market for the British firm. Ceramic tiles made up two-thirds of group sales in 2013.

Orders have kept falling and Xaar chiefs now expect sales this year to be 5-10% below the bottom of the previously announced range of £115-125 million. What's more, visibility for 2015 remains low and revenue will likely slump below £100 million.

That's why Xaar is sacking 160 staff, about 20% of its workforce, in an effort to slash operating costs by 15%.

But will it be enough? Broker Numis Securities has slashed revenue forecasts for 2014 to just £103 million and has cut pre-tax profit estimates by 27% to £22.5 million, giving earnings per share (EPS) of 23.9p. Next year that sinks to £85 million, £3.5 million and 14.4p, respectively. Business isn't tipped to improve much the year after, either.

Xaar shares traded as low as 227p Thursday, down 38% on the day and 80% since February. Now, all of the incredible gains of the past two years have been completely wiped out, and at the current price of 264p the shares trade on 18 times earnings estimates for 2015. Strip out forecast year-end net cash worth about 56p and it's still well over 14 times.

That's a very generous rating, given the slump in profits, confidence at rock-bottom and poor visibility. Yes, Xaar is an industry leader in terms of technology, and new products are planned. But the ceramic tile market is hugely cyclical and it could be years before Xaar is back in shape. Until there's tangible evidence that conditions are improving, the volatile shares could struggle to make meaningful progress.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.