Shareholders in taxi payment services group Cabcharge Australia Limited (ASX: CAB) found no reprieve from its full year results with the stock reversing to a 12-year low this afternoon.
Management tried to put on a brave face when it reported a 16.6% slide in statutory net profit to $46.8 million as revenue slipped 4.7% to $188 million for the year ended June 30, 2015.
The news sent the stock tumbling 2.9% to $3.04 as there's not much to like about the result or Cabcharge's outlook.
Even if the impairment charge of $10.3 million was ignored, adjusted net profit would still have fallen 13.3% to $57.1 million and that's a touch below consensus forecast.
Operating leverage can be a cruel master as a small drop in sales can be a much bigger impact on the bottom line due to the fixed-cost base.
But the bigger miss was on the dividend front with management declaring a 10 cents a share final payment to take its full year distribution to 20 cents a share. Most analysts had penciled in a 22 cents dividend and I suspect they will be downgrading their dividend forecasts for the following few years on the back of the result.
The halving in the service fee Cabcharge can charge to taxi passengers paying by card to 5% is the main driver for the weaker result, and the full impact of this will not be felt until 2015-16.
This means earnings are expected to slip again and the market is tipping a further 6.2% drop in net profit for the current financial year.
This really makes the argument that Cabcharge is cheap somewhat redundant. Supporters point out that the stock is a screaming buy because it is on a 2015-16 forecast price-earnings multiple of 6.7x. The stock has never been this cheap on a P/E basis in the past five years.
Using P/E as a valuation guide when you can't tell with any great certainty when earnings will bottom is a big mistake. Look at mining services stocks. Many have been trading on a 5x-6x P/E over the past year or more, and they still are even though their share prices have halved.
This is the main reason why Cabcharge's 41% share price decline over the past year doesn't bring out the bargain hunter in me.
Interestingly, the real difficult thing to forecast is not the financial consequences of the service fee change but the impact of ride sharing services like Uber.
I think the 6% plus forecast decline in Cabcharge's current year profit might prove to be too optimistic. Simply put, there are better buying opportunities elsewhere.
