The share price of Avon Protection (LSE:AVON) collapsed more than 40% this morning after management provided an update on its body armour business. Given the trajectory of the stock, I think it’s fair to say investors aren’t too pleased. And this decline has pushed its 12-month performance to a horrific -72% return. So what exactly happened? And why am I now looking to add this company to my portfolio?
Avon Protection’s share price crashes on product failure
As a reminder, Avon Protection is a designer and manufacturer of personal protective equipment for the military and first-responders. It has a reasonably diversified product portfolio, including respirators, ballistic helmets, and ceramic body armour. And it’s this latter category that’s the cause of today’s turbulence.
Management had recently secured a contract with the US Defense Logistics Agency to provide its Enhanced Small Arms Protective Inserts (ESAPI) body armour plates. However, before this new product can be put into service, it must be rigorously tested to verify its effectiveness. And during the First Article Testing round, the ESAPI plates failed.
Consequently, approval of this product has been delayed to the second quarter of its 2022 fiscal year that runs to September 2022. This is undoubtedly frustrating for shareholders. Even more so, since $40m of its 2022 guidance was dependent on this product. With this delay, performance next year will likely be below previous expectations. What’s more, the company has also decided to postpone the release of its full-year results for 2021 as additional auditing work is now required.
With no new release date confirmed, and the severity of this product failure remaining largely unknown, seeing the Avon Protection share price crash is hardly surprising.
Taking a step back
The loss of expected income from its body armour business is undoubtedly disappointing. However, I’m personally not too concerned. Management has already begun taking action to rectify the situation. And at the moment, revenue from these armour plates is merely delayed rather than lost.
In the meantime, the rest of its operations seem to be running smoothly. Looking at its half-year earnings, sales of its respiratory devices have grown 23% year-on-year, while its ballistic helmets have more than doubled. And given respirators represent around 70% of the revenue stream, with helmets mainly making up the rest, the company’s income is by no means jeopardised.
Is this a buying opportunity?
Throughout 2021 I’ve looked at this business in February and August, respectively. And both times, I’ve concluded that Avon Protection is a great company but has an inflated price tag. This seems to have been an accurate interpretation given where the shares are trading today compared to then.
Mixing a lofty valuation with bad news is often a recipe for extreme volatility like the kind seen today. However, now that the firm’s market capitalisation stands at a far more reasonable £590m, this stock finally looks relatively cheap. With that in mind, I am now considering pulling the trigger and adding it to my portfolio today.
