Buying companies which have issued profit warnings is a risky move for any investor to make. Often, the initial share price fall does not present a low point, since it can take time for investors to digest the disappointing news which has just been released. Furthermore, profit warnings often come in pairs or even in threes. This means that things can get worse before they get better for the company involved, which increases the risk of investing.
However, sometimes it can be worth buying a stock which has posted a decline following a profit warning. It can lead to high rewards in the long run. With that in mind, could this small-cap be worth buying right now?
Disappointing update
The company in question is life science business Abzena (LSE: ABZA). It provides services and technologies which enable the development and manufacture of biopharmaceutical products. It reported that revenues for each of the company’s business lines have been below expectations since the start of the current financial year. It now expects revenue for the first half of the year to not be significantly higher than the revenue reported in the same period of the prior year.
The reasons for the disappointing start to the current year include lower volumes in certain areas of the business, a small number of large projects that are taking longer to complete than expected, and certain other projects being delayed until later in the year. As such, losses are expected to be higher than previous guidance, which is why the company’s shares are down by over 20% following the update.
Turnaround potential?
Despite the disappointment of Abzena’s profit warning, it expects its performance in the second half of the year to improve. It has good order cover and a high engagement level for new business. Furthermore, it remains committed to the growth strategy announced earlier this year, while its cash balance of £18.8m indicates that it has a strong financial position through which to deliver improving performance.
However, with profit for the full year expected to be lower than previous guidance, its near-term outlook remains challenging. Its share price could fall further in the short run, which means it may be prudent to wait for more positive news before buying a slice of it.
Improving performance
One company which has experienced a difficult period and made a successful turnaround is IAG (LSE: IAG). The British Airways owner reported a loss in 2012 but has been able to deliver a rapid improvement in profitability since then. In fact, its pre-tax profit in the current year is forecast to be 10 times higher than it was in 2013, which shows that its strategy has been working well.
Looking ahead, the company is expected to report a rise in its bottom line of 9% next year. Certainly, there are risks ahead for the business as Brexit may hurt demand for a range of discretionary items. However, with a price-to-earnings (P/E) ratio of just 7, it seems to have a sufficiently wide margin of safety to merit investment at the present time.
