Pace Plunges On Profit Warning

Published in Company Comment on 10 May 2011

The set-top box maker sees shares slashed by 40% as margins slip.

One of the high flyers of the technology sector in recent years has been Pace (LSE: PIC), the maker of set-top boxes and related digital telly and communications trickery.

But Pace's share price climb came to an abrupt halt on Tuesday after the company released a stark profit warning. The share price had already wobbled in March on the news that an important US contract had been delayed, but that is nothing compared to the latest tidings.

At first glance, it might seem as if Pace's problems are a result of the Japanese tsunami, but although that did play a part, there are some more fundamentally worrying difficulties.

Falling margins

Profitability in Pace's European business has so far come in below expectations, and poor demand for Pace Networks products has led to that division being closed as a separate business.

Add to this Pace's building up of an inventory backlog after buying in what now appears to be an excess supply of components, and the tsunami effect which hit the supply chain, and we're seeing a profit hit for the first half that the company will not be able to recover in the second.

Full-year guidance has now been lowered by about 20%.

Operating profit margin for the first half is expected to come in at around the 5.5% mark, though it is forecast to be back to its 8% target in the second half. But that will still leave full year profits down in the £97m to £110m range.

The market, unsurprisingly, reacted badly to the news, and the shares fell more than 40% in morning trading -- the size of the fall presumably being partly due to the unexpected nature of the warning, coming more than 4 months into the year.

Harshly punished?

The key question now is, if Pace is able to get margins back up to its longer-term 8% level, will the shares turn out to be over-sold? Cutting the current consensus analysts' forecasts by 20%, the fallen shares are on a full year prospective P/E of only around 4.5 -- though Pace did have a fair bit of debt at its last year end, of around £200m, after raising loans to fund acquisitions.

But if that looks cheap, what will surely worry investors is that Tuesday's statement didn't really offer much in the way of reasons behind the falling profits -- it gave little more than the bare facts. And this comes at a time when the electronic gadgetry business seems to be in a pretty healthy phase.

Is there an opportunity to profit from a panic-led over-reaction here? Maybe, but I'd really like to have seen some more flesh on the bones of that statement, and have some understanding of why things have gone so unexpectedly wrong.

Over to you -- are you going to dip in, or is it bargepole time?

More from Alan Oscroft:

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

SackOSpuds 10 May 2011 , 1:31pm

I bought a few at 96p within the last hour. Just looks oversold to me. In the long term, I am a bit nervous about the competition in these consumer electronics products, so I don't regard this as a long term buy and hold.

mcturra2000 10 May 2011 , 1:53pm

Not happy. Not happy at all. Deep sigh.

"Is there an opportunity to profit from a panic-led over-reaction here?"

The problem here is that I thought the drop in March was a good opportunity to top up. And look how wrong I turned out to be on that! This is turning out to be one of those companies where it looks cheap, all the way down. It's still got a growth story behind it - SO FAR - but it's rapidly turning into a wonky donkey. I wont sell, because the price seems too cheap in relation to future expectations. Still, neither am I not keen to pile on more, as the risk on this thing is clearly ratchetting up.

There's too much bad news coming out. First it's the special charges, then it's the delayed contracts, now it's the "tsunami effect". What next? Summers that are too hot, and winters that are too cold?

If it wasn't for the fact that I am already in, I'd probably sit this one out on the sidelines, unless there were weighty (and I do mean weighty) director purchases.

foolishtim12 10 May 2011 , 1:53pm

I considered April's share price fall from 2.37 to around 1.60 to be a harsh recaction to what was a simple order-deferal (not loss of an order), but the latest setback, triggered by an unexpected interim statement this morning, had a further 40% negative impact on the share price. Even with the closure of its non-core network products arm, for a company that is growing its profit year-on-year from £71m in 2010 to an adjusted forecast of £97-£110m in 2011, it must now be undervalued. I think a couple of awkward steps recently, like being accused of releasing price-sensitive information without informing the market first, and then a negative sounding trading update today have not helped confidence, but I'm a buyer at these kinds of prices. The company's trajectory still looks to point upwards.

jf2007 10 May 2011 , 2:27pm

Profit warnings usually come in threes. A lot of people piled into HMV because of its low P/E ratio. I'd rather wait a few months before considering Pace

yorkshirepud 10 May 2011 , 3:47pm

Don't know if anyone read the article in the FT weekend money section where the stockmarket historian chap reported on Pace, in a nutshell that it had reached its support level and the downside was limited! After today's fall, yes of course there's further downside risk, but I made a fair(five figure)investment at 92p this morning and for value investors, this has to be worthy of serious consideration.

Accumul8er 10 May 2011 , 4:30pm

Don't catch a falling knife. Profit warnings come in threes. I will probably regret this but I'm buying some at 92p. I think the downside is probably about 80p and the shares could easily double within 12 months. Having said that, I don't like the fact that the directors don't own many shares and the high level of gearing, not to mention the technology risks! Only for the brave.

TMFBoing 10 May 2011 , 5:40pm

Hi Folks,

My instinct here says that Pace shares are indeed oversold, but then I keep hearing those three letters - H... M... V...

I sincerely wish those who have bought today well - and I promise I won't jinx your investments by buying any myself ;-)

Best,
Alan

UncleEbenezer 11 May 2011 , 12:29am

Hats off to folks diving in for five-figure sums! I made a smaller (four-figure) purchase at 92p. A falling knife can go either way, and this one looks cheap.

But I do wonder about UK companies manufacturing electronics. From an investor PoV, this sorry tale is eerily reminiscent of PRW. At least the latter is up off its bottom!

mcturra2000 11 May 2011 , 7:02pm

HMV. Promethean World. Pace. Aye caramba. At least no-one has said "Woolworths" yet.

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.