Having been so bullish on Pace Micro Technology (LON:PIC) , I have now reversed my opinion. I originally bought on growth expectations at a reasonable price. Although revenues look set to continue expansion, there appears to be problems on the cost side. Pace has hit a number of speed bumps this year, and it is clear that the rosy picture I had envisaged originally is fading fast. Pace is infamous for being a "serial disappointer", and this year it has seen it perform a veritable tour de force on that score. Even as recently as 18 April, a time when PIC was at 153p (now at 97p) I commented that on a PER of 6 and double-digit growth expected, it was clearly undervalued. I did note some risks. It seems that those risks are now increasing. Let's recap the position as I understood it at the time.
The good:
- Y/E Dec 2010 reported revenues up 17%,
- EPS up 24%
- Similar levels of revenue growth expected in 2011, and improved return on sales on top of that
- Overall, the Board is confident that Pace has created an excellent platform for growth as its customers continue to lead the global evolution of managed digital services into and around the home.
The bad, which caused the share price drop in March:
- exceptional charge of £19m for acquisition integration costs
- delay in a customer upgrade plans to 2012
In a trading update this week, Pace reported the following:
- increased costs due to inventory building
- Japanese Tsunami exacerbating supply chain issues
- Pace Europe profitability below expectationsclosure of Pace Networks as a standalone business unit due to insufficient demand
- Operating profit expectations for 2011 reduced to £97m-£110m
- Pace Americas performing ahead of plans. Well, at least that's some good news.
- Pace Europe has continued to win business, for example with Tata Sky in India and Net Servicos in Brazilthe first half underperformance will not be made up in the second half
Some views on the boards, including FT Alphaville:
- consensus downgrades to 2011E forecast of c. 25% in EPS expected
- switching KPI (Key Performance Indicators) is a worrying sign of moving the goalposts. As Warren Buffet would have it: painting the target around wherever the arrow landedthe market is complex, and it's difficult to know who the winner will be
- Since…
