Another profit warning from Chemring (LON:CHG) caused its shares to plunge by some 17% this week, and although trying to catch a falling knife is usually as dangerous as the products made by the company, its growth over the last decade makes it worth a closer look.
Chemring is a defence company with a market capitalisation of £536m, placing it in the FTSE250. The group specialises in the manufacture of energetic material products and countermeasures and provides solutions in defence, security and safety markets. They are involved in advanced development programmes in the UK, USA, Europe and Australia and operate in four market sectors: Counter-IED, Countermeasures, Pyrotechnics and Munitions. As a result of the growth in threat detection systems, electronics now represents 40% of their revenues and the long-term strategy is to maintain a balance between high technology electronics and energetic products.
Over the 10 years from 2002 to 2011 the company appears to have gone from strength to strength with compounded annual growth rates as follows: revenue 25%; adjusted EPS 37%; basic EPS at 33%; and dividends per share at 31%.
Had £1,000 been invested in the company at the start of the period it would have been worth £11,873 at the end of the 10 years with dividends reinvested: an annualised total return of 28% (source: Chemring).
But good things don’t last forever…
Despite the excellent long term record of the company, 2011/12 has been much more difficult and the defence sector generally has struggled with government budget cuts which has either seen orders cancelled or delayed. But it appears that Chemring’s management have failed to adequately forecast the disruption to its business and have continued to reduce profit expectations as the financial year progressed. The market was therefore taken by surprise by the end of year trading statement on Thursday which delivered the knock out blow:
…the Group has reduced its expectations for its earnings per share for the financial year ended 31 October 2012 by 13 pence.”
The announcement cited 3 principal reasons for the reduction: (1) delays in the granting of some export licences regarding a contract to supply a Middle Eastern customer with vehicle based mortar systems; (2) delay in the receipt…