Sunday, February 27, 2005
Coral hits rocks
On Friday at 3 p.m. Coral Products, a U.K. listed company manufacturing compact disc and DVD cases, kicked investors in the wallet with news that trading has gone from weak to worse.
we advise that profit for the current year ending 30th April 2005 will be significantly lower than the market's current expectation. The influences of unexpected raw material price increases and slower than expected demand in the DVD market are having an adverse impact on operating margins. Although our market remains increasingly competitive, we are taking steps to mitigate our raw materials exposure
Shares were hammered immediately following this announcement, down at 25p after opening at 35. This sort of announcement is what the market calls a profit warning. The news a company is failing to operate at the level of profitability everyone expects forces a swift re-rating as it's reputation is torn apart faster than a kosher cookbook at a Hitler Youth reunion.
But the consensus appraisal might not be accurate and profit warnings often present golden opportunities to buy stock at a beaten-up price as negative sentiment can reaches a never to be exceeded crescendo.
So, in light of this news, what is Coral worth paying for? In December 2004's interim results, the company reported a ten percent decrease in turnover but a fifty percent fall in profits. The board tried to spell it out for any remaining investors of a Panglossian persuasion:
Profits for the full year will not reach those of last year and, as we enter the second half, trading conditions remain difficult within our industry.
The dividend was cut from 1.05p to 0.7p. Friday's announcement raises the prospect of the dividend hangman bidding investors a good morning and shaking their hands at 7a.m. on the announcement of final results in July.
The recent announcements are unnerving on many fronts. As a UK based manufacturer of commodity goods, Coral Products' longevity thus far is a surprise in itself. In recent years manufacturers have only managed to increase shareholder returns by offshoring labour-intensive manufacture, as Mayborn have done so successfully in China or pursue high-margin services work a la WPP.
With raw materials prices and currency movements crushing the company's profits it's difficult to see Coral returning to the level of profitability it reported in 2003, when shareholders enjoyed 6.89p of earnings per share. Before this news Coral looked reasonably attractive. Total net assets measured £11.5m versus a market capitalisation of £7.5m. The market price is now approximately £5m but visibility of earnings has been severely clouded by Friday's announcement and I'm left wondering if a company like Coral has any future in the current economic climate of high wages and expensive raw materials.
Everything has a price that makes it attractive but I'll suspend judgement until I've digested Friday's exocet.
The Artul Dodger
we advise that profit for the current year ending 30th April 2005 will be significantly lower than the market's current expectation. The influences of unexpected raw material price increases and slower than expected demand in the DVD market are having an adverse impact on operating margins. Although our market remains increasingly competitive, we are taking steps to mitigate our raw materials exposure
Shares were hammered immediately following this announcement, down at 25p after opening at 35. This sort of announcement is what the market calls a profit warning. The news a company is failing to operate at the level of profitability everyone expects forces a swift re-rating as it's reputation is torn apart faster than a kosher cookbook at a Hitler Youth reunion.
But the consensus appraisal might not be accurate and profit warnings often present golden opportunities to buy stock at a beaten-up price as negative sentiment can reaches a never to be exceeded crescendo.
So, in light of this news, what is Coral worth paying for? In December 2004's interim results, the company reported a ten percent decrease in turnover but a fifty percent fall in profits. The board tried to spell it out for any remaining investors of a Panglossian persuasion:
Profits for the full year will not reach those of last year and, as we enter the second half, trading conditions remain difficult within our industry.
The dividend was cut from 1.05p to 0.7p. Friday's announcement raises the prospect of the dividend hangman bidding investors a good morning and shaking their hands at 7a.m. on the announcement of final results in July.
The recent announcements are unnerving on many fronts. As a UK based manufacturer of commodity goods, Coral Products' longevity thus far is a surprise in itself. In recent years manufacturers have only managed to increase shareholder returns by offshoring labour-intensive manufacture, as Mayborn have done so successfully in China or pursue high-margin services work a la WPP.
With raw materials prices and currency movements crushing the company's profits it's difficult to see Coral returning to the level of profitability it reported in 2003, when shareholders enjoyed 6.89p of earnings per share. Before this news Coral looked reasonably attractive. Total net assets measured £11.5m versus a market capitalisation of £7.5m. The market price is now approximately £5m but visibility of earnings has been severely clouded by Friday's announcement and I'm left wondering if a company like Coral has any future in the current economic climate of high wages and expensive raw materials.
Everything has a price that makes it attractive but I'll suspend judgement until I've digested Friday's exocet.
The Artul Dodger
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