This FTSE 250 growth stock just crashed 18%. Is this a buying opportunity?
In the current market environment, investors are in an unforgiving mood. If a company’s revenues or profits miss market expectations, you’re likely to see its shares plummet as investors drop the stock like a hot potato.
This is exactly what’s happened to FTSE 250 IT infrastructure firm Computacenter(LSE: CCC) today. Announcing Q3 results, a revenue miss has seen the stock punished hard. As I write, it’s down 18%.
So, let’s take a closer look at the numbers. Do I think the share price fall created a buying opportunity, or is CCC a stock I’d avoid?
Revenue fall
Today’s Q3 update is not what investors were expecting. While year to date revenue was up 11%, overall group revenue for Q3 declined year-on-year by 3% to £900m, and revenue in the Technology Sourcing segment fell 5%. Breaking the quarterly performance down geographically, the UK was a significant underperformer, with revenue falling 9% (Brexit uncertainty?), as was France, which saw revenue decline 6%.
Computacenter blamed the revenue drop on a challenging comparison, noting that last year it experienced a particularly strong Q3, in which revenues surged 20% (versus H1 2017 revenue growth of 9%).
Looking ahead, the group said it was expecting growth in Q4 to pick up, but that levels would not match the growth seen in the first half of 2018 (revenues up 18.1%).
It also noted that while there were challenges in the Infrastructure Managed Services marketplace, which were making “growth more difficult”, the outlook for its FY2018 trading result remains in line with the board’s expectations. Moreover, it advised that the core technology drivers of digitisation, cloud, security, and network capacity improvement, remain “robust” and that the company is positioned well for “future growth into 2019 and beyond.”
So, what should investors make of today’s update?
Short-term hiccup?
While today’s numbers don’t look great, I’m inclined to view the group’s Q3 performance as a short-term hiccup. So I’m not convinced the growth story here is over just yet.
With the group enjoying Q3 2017 revenue growth of 20%, last year’s Q3 was always going to be a challenge to match. And a slowdown in growth in the second half of 2018 was not entirely unexpected, as chief executive Mike Norris advised back in August that growth during the second half of the year could be slower, compared to 2017.
I think we need to put the Q3 numbers in perspective. A 3% revenue dip for the quarter is not the end of the world. Year to date, revenue is still up 11% which, while not a spectacular performance, is still solid.
Investment case
CCC has been on my watchlist for a while now, and after the recent share price fall (down over 35% since mid-July), the investment case, from a long-term view, is starting to look quite interesting to me. The IT specialist generates a healthy return on equity and plenty of free cash flow, has low debt, and has now notched up 11 consecutive dividend increases. Trading on a forward P/E of around 14 currently, it looks to be the kind of stock that could potentially provide me with growth and income going forward.
I’m wary of trying to catch a falling knife, of course, so I probably won’t buy the shares just yet. However, with demand for IT services likely to remain strong in the years ahead, I see appeal here from a long-term investing perspective.
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Edward Sheldon 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.
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