Should I sell falling knife McBride plc after today's 15% slide?
My portfolio took a hit this morning, when white label consumer goods group McBride (LSE: MCB) issued a profit warning. The company said that weak trading in its Personal Care division and higher costs are likely to outweigh stronger growth in its Household division.
Earnings for the year to 30 June are now expected to be "broadly in line with the prior year". Based on broker consensus forecasts, previous expectations were for adjusted earnings per share to rise by around 20% this year.
What's gone wrong?
McBride's main business is producing own-branded cleaning and personal care products. When I added the shares to my portfolio last April, I saw the business as a potential turnaround and growth opportunity. Unfortunately, this Manchester-based firm has been a disappointing performer so far.
The problems appear to lie in two areas. The first is that revenue from the Personal Care & Aerosol (PCA) division fell by 12.1% during the six months to 31 December. Around half of this decline was due to a deliberate decision to exit unattractive contracts. That might have been sensible, but the group has yet to replace these lost sales. Management says it is "currently developing an accelerated transformation plan" for the PCA division.
The second problem is that costs are rising. In today's statement, management cited higher costs for raw materials, labour and transportation.
Although revenue from the Household division is now expected to rise by a "mid-high single-digit percentage" during the second half, this won't be enough to prevent the group missing its profit targets.
Buy, sell or hold?
McBride says that in order to meet a recent surge of orders for the Household division, it's going to postpone planned efficiency programmes. I'm a bit concerned by this ad-hoc approach, given today's other news. It sounds to me as though management control of the business might not be as tight as I'd like to see.
Many of the company's customers are big supermarkets chains. Today's news suggests to me that these heavyweight buyers are using their size to put further pressure on the firm's profit margins. I fear that debt could also start climbing again.
I'm not going to act immediately, but I'm tempted to sell my shares. I certainly won't be buying any more.
One stock I would own
One consumer goods stock I rate highly is soft drinks firm A. G. Barr (LSE: BAG). Unlike McBride, the maker of drinks including Irn Bru, Rockstar and Tizer has delivered consistently high profit margins and steady growth for many years.
Barr's operating margin has averaged 15% since 2012. Over the same period, the group's return on capital employed (ROCE) has averaged 20%. A high ROCE is generally seen as a good indicator of a business that's able to fund its own growth and make profitable investments in its business.
Cash generation is also strong. This has helped the firm to deliver average dividend growth of 9% per year since 2012, while keeping its balance sheet almost debt-free.
The stock currently trades on a 2018/19 forecast P/E of 20, with a forecast yield of 2.4%. Although I'd prefer to buy on the dips, this is a stock I'd be happy to add to a long-term portfolio at current levels.
One growth stock I'd consider
McBride's poor performance suggests to me that investors should focus on consumer stocks with strong brands. These often enjoy stronger pricing power and more consistent profits.
One potential bargain in this sector is the growth play chosen by our top analysts forA Top Growth Shares From The Motley Fool. The company concerned has a well-known brand and is expanding steadily in the UK and overseas.
Roland Head owns shares of McBride. The Motley Fool UK has recommended AG Barr. 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.