Interactive Investor

Why Laird shares just got smashed

19th October 2016 12:56

Lee Wild from interactive investor

As reactions to profit warnings go, the sell-off that greeted Laird's on Wednesday morning was brutal. With a market in no mood for any further slip-ups following poor half-year results, the share price crashed at the opening bell and within an hour had halved. Over £400 million was wiped off the value of the business, but is the sell-off justified, or a massive overreaction?

Laird is a great British company. It makes electromagnetic interference shielding materials - the parts that stop your smartphone or tablet overheating and interfering with other devices. Its biggest customer is Apple, generating 15-17% of sales.

But Laird talks of a "very challenging" third quarter for its performance materials division due to "much slower production ramp, pricing and margin pressures and the overall lack of visibility in the mobile devices market".

Be in no doubt, this is a massive test for new chief executive Tony QuinlanThat's odd, as recent industry data implies that end demand for iPhone7 has been better than expected.

Clearly, the inference here is that Laird is a victim of fierce competition within the Apple family of suppliers. And, remember, the final half of the year is normally a belter for Laird as electronics manufacturers release new products in time for Christmas.

This is bad news for chief executive Tony Quinlan, who's only run the business for six weeks. After a year as finance director, he was promoted in September when Cobham poached David Lockwood. Be in no doubt, this is a massive test for the former M&S number cruncher.

In his first missive since taking over, Quinlan had to admit that "the acceleration of production for mobile devices has come much later than in previous cycles and visibility on volumes remains poor".

He blames "unprecedented pricing pressures" for the hit on margins, plus "operational factors" for downgrading full-year underlying pre-tax profit estimates to just £50 million. JP Morgan had pencilled in £80.3 million and consensus was for £75.5 million. And the miss comes despite a currency benefit of around £5 million since half-year results in July. Ouch!

Thankfully, Laird's year-end net debt/cash profit ratio should be within banking covenant limits of 3.5 times, but this warning does shift focus onto the balance sheet. Quinlan knows he must hack into costs, hard and fast. We're told that actions have been taken to stabilise and improve the business, and further progress is expected in 2017.

Put to the test

I admit to having a soft spot for Laird. I'd talked to David Lockwood on numerous occasions during his four years in charge, and he clearly knew his business. In fact, I backed the shares when writing for Investors Chronicle back in 2013. They subsequently doubled.

I'm sure Quinlan knows his onions, too, but he'll be put to the test in the next few months. He already had his hands full with the Wireless Automation and Controls (WACS) division, where weak commodity prices caused a slump in US rail freight work. Laird also got its sums wrong when it bought Novero recently, and losses at the German telematics company will be much larger than expected this year.

And Quinlan faces some tough choices.

Nick James at Numis Securities suggests Laird might reconsider "whether Apple and the smartphone market in general represent viable business opportunities". Slashing earnings per share (EPS) forecasts by 36% for this year to 14.3p, and by 39% for 2017 to 15.5p, puts Laird on a forward price/earnings (PE) ratio of 11.8 times, dropping to 10.9.

That's cheap, and the dividend yield based on the payout for 2015 is currently 7.7%. Don't be fooled, however, those numbers screams risk. And, while a stronger dollar brings benefits to substantial US earnings, betting on a rapid recovery from near-five-year lows is a dangerous business.

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.

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