Should you catch this falling knife after another NCC Group plc profit warning?

Is the bad news out in the open at NCC Group plc (LON:NCC), or is there worse to come?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Does cyber security group NCC Group (LSE: NCC) offer value after today’s profit warning, or are further falls likely? The company’s shares have now fallen by 36% in 2016, but adjusted profits are still expected to rise during the current financial year.

In this article I’ll take a closer look at NCC. I’ll also consider the investment case for a stock whose shares have been hit by industry news, despite management guidance that “no material impact” is likely.

Sales up by 35%

Today’s profit warning from NCC formed part of its first-half trading update. The news initially seemed good. Group revenues rose by 35% to £125.8m during the first half of the year, apparently putting the group on track to hit full-year forecasts of £245.8m.

Should you invest £1,000 in BAE Systems right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BAE Systems made the list?

See the 6 stocks

However, NCC also updated shareholders on the expected impact of the contract losses reported in October, when the shares fell by 35% in one day. NCC expects full-year adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to be between £45.5m and £47.5m. That represents an increase of up to 5% on last year, but investors had been expecting much larger gains.

A second risk is that the group’s poor performance during the first half means that more than half (54%) of profit is expected to be earned during the second half. Companies that say profits will be weighted to the second half often end up issuing another profit warning later in the year.

I’m not convinced that NCC shares are cheap enough to be a genuine bargain. The group’s profit margins fell last year, and the outlook for this year remains uncertain.

Today’s fall suggests that the market now expects earnings to be below consensus forecasts of 11.9p per share in 2016/17. Even if NCC does hit this forecast, the firm’s shares still trade on a forecast P/E of 16, with a yield of just 2.5%.

I’d like to see evidence that performance has stabilised before committing any cash to this company.

This could be a better buy

Shares of software group Playtech (LSE: PTEC) have fallen by 13% since the end of November. One of the main reasons for this decline is that the group provides software for online spread betting firms. New proposals from the FCA to tighten the regulation of this sector seem likely to reduce profit margins.

Investors are concerned that demand for Playtech’s software could fall. But management says the proposals “are not expected to have a material impact”. If correct, then the shares could be attractively priced at the moment. The stock currently trades on a forecast P/E of 14 for the current year, falling to a P/E of 11.5 in 2017.

Playtech also has income potential, thanks to strong free cash flow. In addition to a forecast ordinary dividend yield of about 3.3%, it has just paid a special dividend of €0.46 per share, and commenced a €50m share buyback programme.

Current forecasts suggest adjusted earnings per share could rise by 23% in 2017. The group’s recent growth has been strong, and may continue. However, investors need to remember that the two main sectors in which Playtech operates — online gambling and financial betting — are at constant risk of regulatory disruption.

As things stand, I’d rate its as a hold.

Should you invest £1,000 in BAE Systems right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BAE Systems made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of NCC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With value investing back in vogue, I’m taking a leaf out of Warren Buffett’s playbook

With tariffs and trade wars resulting in heightened market volatility, Andrew Mackie takes comfort in Warren Buffett’s words of wisdom.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »

Investing Articles

Investors considering HSBC shares could aim for £8,453 a year in passive income from just £5 a day!

A relatively small daily investment in HSBC shares over several years can produce an extraordinary level of annual passive income…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »