The share price of illustrated book publishing and distribution company Quarto Group(LSE: QRT) slumped over 25% on Tuesday after it released a trading update. Clearly, such a large decline in its valuation is extremely disappointing for its investors. In the short run, such a large swing in investor sentiment could lead to further share price declines.
However, does this provide a buying opportunity for new investors? Will the company be able to deliver dramatically improved performance over the long run?
The update released by the company focused on a review of the guidance provided to the market. In undertaking this process, the company noted that the guidance currently in the market uses a publishing-only baseline for 2016 which does not reflect the benefit of £2.1m relating to the reduction in the amortisation of capitalised pre-publication costs. This means that the baseline for 2017 and beyond has been set too high. As such, the update essentially amounts to a profit warning and a downgrade to the company's mediu- term outlook.
The update also discusses the challenges faced by the company at the present time. It is experiencing a soft retail environment in domestic markets, which is now set to result in a lower than expected trading performance in the year to date. But there is a more pronounced second-half weighting, with the company confident that its strong publishing programme will perform relatively well in the second half of the year.
Clearly, Quarto is experiencing a transitional period at the present time. It is seeking to refocus on its core publishing business at a time when trading conditions are particularly challenging. It has also engaged in asset disposals which have caused the company's performance to be more weighted to the second half than in prior years. As well as this, the company has changed its CFO, which it could be argued brings further uncertainty to its near-term outlook.
Despite this, the business continues to make progress with its strategic objectives according to Tuesday's update. Its new organisational structure has the potential to create a more nimble business which could be more flexible in its approach to changes in future demand.
With the company facing a difficult outlook, its share price could remain highly volatile. Further falls in its valuation cannot be ruled out. Although it is making encouraging progress regarding the changes it is making to its business model, doing so while trading conditions are tough means its financial performance may suffer.
As such, it may be prudent to await further news from the company, or else for its share price to stabilise. If it is able to deliver improved performance in the second half of the year, its stock price could rise. But between now and then there may be better options available elsewhere.
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Peter Stephens has no position in any 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.