What to do with bombed-out Xaar

It's always nice to go out on a high, but it's looking less likely now for Xaar boss Ian Dinwoodie who earlier this year flagged plans to retire in 2015. A second profits warning since June has sent shares in the ink-jet printer technology specialist plunging over 30% to a 17-month low. They've now lost about two-thirds of their value this year, and with a number of headwinds set to peg back growth, the likelihood of a quick recovery looks slim.

A 10% drop in first-half adjusted revenue to £60.4 million, gross margins of 47% and 28% slump in adjusted pre-tax profit to £16.1 million were largely in line with reduced forecasts. The dividend also goes up by a fifth to 3p. But a whole heap of problems have convinced management to cut revenue forecasts again, from £130 million in June to just £115-125 million.

Dinwoodie blames "limited visibility of short term demand and the usual seasonal lull around Chinese New Year." Greater competition has cut prices, too, a slowdown in construction activity in China has hit demand from the ceramic tile decoration sector during the third quarter, and other applications are taking longer to catch on.

Investec Securities is taking no chances, slashing estimates for full-year adjusted pre-tax profit by a fifth to £26.2 million, giving adjusted earnings per share (EPS) of 27.6p. And don't expect much growth next year, either. The broker pencils in a profit of £26.7 million for 2015 and EPS of 27.7p.

But even at 419p, Xaar shares trade on 15 times prospective earnings. Strip out forecast year-end net cash of £40.5 million, or 53p per share, and it's still over 13 times. While there is the clear temptation to pick up a quality business on the cheap, the rout may not be over.

Explosive growth in recent years is unlikely to be repeated, and in an increasingly competitive industry Xaar will rely on new products and technology to drive the conversion of printing applications from analogue to digital processes.

"These waves of industry conversion have limited visibility and there remains risk to our assumptions for ceramic related revenues in full year 2015," warns Investec. Recent director share buying has certainly proved no indicator of short-term performance. Could the old adage that profit warnings come in threes be more reliable.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.