Is this small-cap stock a falling knife to catch after sliding 10% today?
Shares in Solid State(LSE: SOLI), a provider of specialist industrial/ruggedised computers, electronic components, and advanced antenna products, have lost 10% of their value in early deals this morning.
The declines have been prompted by a profit warning, which has clearly shocked investors. The question now is, should investors make the most of this fall and buy into Solid State's growth story, or should they stay away?
What's the fuss about?
It seems that the market is most concerned about Solid State's decision to slightly lower its profit expectations for the year as a result of an increase in overheads after investment in growth and margin initiatives.
What's more, after investment in and restructuring of the communications business unit, the lead time to "win and deliver some of the complex antenna programmes has taken longer than expected, resulting in a performance below management's expectations."
Put simply, the company's actions to prepare it for future growth have weighed on margins, and now, for the full-year, profits are expected to come in lower.
Is this a big deal for the company? I don't believe that it is. As well as the profit warning, the company also told investors today that group revenue for the period to 30 September 2017 increased by 12% to £22.5m. It said this reflected "strong organic growth in the distribution division of close to 20% and a 7% increase in the manufacturing division reported revenues."
It looks as if this performance will be repeated during the second half of the year as well. Management notes in today's update that the open order book at the end of the period was £18m, up significantly from the £14.8m reported at the end of the same period last year.
All in all, it looks as if the business is still growing despite this profit blip.
What do analysts think?
Analysts had already been expecting a slow year for the company ahead of today's update. Earnings per share growth of 1% is pencilled in for the year ending 31 March 2018. It now looks as if earnings per share might fall.
Still, for fiscal 2018, earnings growth of 11% is projected. Now that Solid State has completed its restructuring, I wouldn't be surprised if this figure is revised higher as this year's growth is reflected in next year's earnings.
Based on current earnings projections, the shares are trading at a forward P/E of 15, falling to 13.5 for 2018. In my view, these multiples aren't overly demanding. Although, if further problems emerge, such a valuation does not give much room for manoeuvre.
Overall, today's profit warning from Solid State is not the end of the world. However, I'm not buying the company after its declines today. If there are any more problems, the high valuation will come back to haunt the business, and the shares could fall some more.
That being said, if earnings make a recovery, which I think is likely, the shares could rise from here so current owners may not want to give up just yet. There's also a 2.6% dividend yield covered 2.6 times by earnings per share.
Even though the company's growth might be spluttering, that dividend yield of 2.6% covered easily by earnings per share makes Solid State an income stock to watch.
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Rupert Hargreaves does not own any share 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.