Global content management and language translation software and services specialist SDL (LSE: SDL) has slumped 25% today after a disappointing update. It has added greater uncertainty to the company’s outlook and could mean that its performance for the current year is below expectations. Could this be an opportunity for less risk-averse investors to buy it? Or, is a turnaround unlikely given how weak investor sentiment now appears to be?
Uncertain outlook
SDL’s trading performance for the year to 31 December is currently on target when it comes to its sales pipeline. However, the company is reliant on the closure of certain software deals which may not be processed and fully awarded by the end of the financial year. If they are not closed, it will mean that adjusted EBITA (earnings before interest, tax and amortisation) will be below market expectations on a like-for-like basis.
In addition, the company has also experienced a faster than forecast shift from perpetual license sales to Software-as-a-Service (SaaS) sales. This has caused higher costs to be recognised in the current year, with revenues deferred into future years. As well as this, the company plans to increase overall investment in order to capitalise on the growth opportunities which it sees in the market.
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Potential turnaround?
Clearly, after a 25% share price fall, the near-term outlook for SDL is highly uncertain. It states in its update that the outlook for its industry remains very positive, and it believes it can move to the forefront of the industry with the right investment. And with it anticipating double digit revenue growth and mid-to-high teens profit margins over the medium-to-long term, it could offer scope for a turnaround in future years. For now, though, it may be best to wait and see how its shares perform over the next few weeks before buying a slice of it.
Improving outlook
Also struggling to deliver share price gains recently has been consumer goods company Reckitt Benckiser (LSE: RB). The company’s stock price is flat over the last year while many of its global consumer goods peers have soared. One reason for this could be the company’s valuation, which has been among the highest in its sector.
Now though, Reckitt Benckiser has a price-to-earnings (P/E) ratio of 20.6. This appears to be a fair price to pay for a company that is forecast to post a rise in its bottom line of 6% in the current year, followed by further growth of 10% next year. Beyond that, its planned restructuring in 2018 could create a more streamlined and efficient company which is better able to deliver further double-digit growth in future years.
With a range of high-quality brands in its product stable and exposure to fast-growing markets across the emerging world, Reckitt Benckiser seems to have the potential to deliver a successful turnaround. As such, now could be the perfect time to buy it.
