Good morning!

Xaar (LON:XAR)

Share price: 440p
No. shares: 76.4m
Market Cap: £336m

I dropped SCVR coverage of this innovative industrial printhead manufacturer last year, as the shares shot up, taking its market value into mid cap territory. However, after a series of profit warnings (another one today) it's coming back into range, indeed it's a stock that I already hold, having seen value at around 500-550p, based on its strong Balance Sheet with plenty of cash, and a PER that was in the low teens at the time.

The catalyst for my initial buys was the R&D Director spending £200k buying stock - which clearly indicates that he must feel confident about the new products due for launch over the next year, which seem to have potential to be game-changing (allowing inkjet printing directly onto any shape, such as bottles, without the need for a label). I am guessing that more Directors buys could be likely now interim results have been published today.

Averaging down - In my view this morning's initial 25%+ drop in share price was a considerable over-reaction, so in my opinion was a buying opportunity on the opening bell. People say that averaging down is a losing strategy, but personally I've found it can be a highly successful strategy, but only if you are certain that the difficulties triggering the profit warning are of a temporary & recoverable nature, and only if you're prepared to hold for a while, riding out any further price weakness. Averaging down on a stock that is fundamentally going to pot, or is a stale story stock, is of course a disastrous strategy, so great care is needed!

Interim results - As you can see from the headline "adjusted" figures below, taken from today's interims, both turnover & profits are down - the main reason for this is because of increased competition in their main market of printheads for ceramic tile manufacturers. Although this is a known factor, and a broker says this morning that the interim results were in line with expectations. 2013 should really be seen as a spectacular one-off year of growth, which is not sustainable;


Outlook - the long-term prospects sound good (and bear in mind that only something like 3% of potential industrial printing has made the move from analogue to digital, and that the technology is being…

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