Should you consider falling knife Best of the Best plc after 25% drop today?

Best of the Best (LSE: BOTB) operates a weekly competition to win a luxury car through a 'spot the ball'-type challenge, operating at UK airports and online.

Unfortunately the firm's shares fell by more than 25% on Wednesday after it was forced to issue a profit warning. This setback is due to a change in the tax rules governing such competitions. It seems that new tax rules mean that Best of the Best will now have to pay Remote Gaming Duty instead of VAT.

A sizeable hit

Helpfully, management has provided detailed guidance about the likely impact of the changes.

Pre-tax profit was £1.5m for the year ending 30 April. This is expected to fall to "not less than £1.4m" during the current year as the new changes take effect part-way through the year. A drop to "not less than £1.2m" is then forecast for the 2018/19 financial year.

I estimate this could be equivalent to earnings per share of about 12.7p this year and 10.9p next year, compared to previous broker forecasts of 13.1p and 13.7p per share.

Any good news?

There was also some potential good news. Best of the Best is currently in the process of trying to claim back £4.5m of VAT. That's equivalent to 44p per share. If the claim succeeds, I'd expect some of this cash to be returned to shareholders.

Another potential positive is that the company now plans to buy back some of its shares from the market. Over time, this should help to support earnings per share and improve the firm's ability to pay larger dividends.

My view

The change which triggered today's warning looks like a one-off and does not appear to be the fault of management.

Given the group's history of growth and cash generation, I'm inclined to take a fairly positive view of the shares.

A fashionable choice

Shares of fashion retailer Joules (LSE: JOUL) have drifted lower over the last couple of months, but at 268p the shares are still worth 37% more than when the group floated in May 2016.

This week's trading update provided a fresh view on performance in a difficult market for retailers. Unfortunately, the company's statement did seem to be a little short on detail.

Although we learned that sales grew by 18.2% to £96.2m during the six months to 26 November, no information was provided on like-for-like sales growth from its stores. As 10 new stores were opened in the period, it would have been useful if the group had broken out like-for-like growth and internet sales from this total.

On a similar note, I wasn't sure what to make of the group's outlook. Chief executive Colin Porter commented that "trading conditions will remain challenging" but said that the brand had "performed well" so far this year. On balance I suspect that results are expected to be in line with expectations.

On that basis, earnings per share are expected to climb by around 20% this year and in 2018/19. This gives the stock a PEG ratio of about 1.5, falling to 1.1 next year.

In my view these figures suggest the shares may be fairly priced at current levels. I'd rate the stock as a hold.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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