Why the Ellex Medical Lasers Limited share price was SMASHED today

Ellex Medical Lasers Limited (ASX:ELX) shares have been smashed today following a disappointing trading update. But should you buy the dip?

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It hasn't been a great day to be a shareholder of Ellex Medical Lasers Limited (ASX: ELX).

In morning trade the global leader in medical devices for the diagnosis and treatment of eye diseases saw its share price plummet a whopping 22% to 97 cents.

The reason for today's decline is the release of a first-half trading update which revealed that sales revenue is expected to be flat on the first-half of last year at $34.3 million.

Whilst this is a big disappointment, I believe it is important to understand the reason behind the sudden slowdown in sales.

According to the release the company's move to its new manufacturing facility in Adelaide caused production capacity limitations.

This ultimately meant the company was unable to manufacture its core Laser and Ultrasound products against its targets, resulting in a significant customer order backlog. Management expects to ramp up production in the second-half in order to clear this backlog.

It is worth noting that its iTrack product was not impacted by this manufacturing mishap, due to being manufactured at its Californian facility. Sales for its iTrack product increased by 37% compared to the prior corresponding period.

Pleasingly management is confident that this won't hinder the company from delivering full-year revenue that is materially higher than FY 2016's result.

I can't help but feel that today's sell-off was a bit of an overreaction. Whilst it is disappointing to see sales flat during the half, if the company delivers on its promise in the second-half then Ellex could prove to be a bargain at today's price.

After all, its shares are currently changing hands at 1.9x sales, which is comparatively cheaper than the sector average of 3.4x.

I'm confident that Ellex has a bright future and like Nanosonics Ltd. (ASX:NAN) and Compumedics Limited (ASX: CMP) could be a great long-term investment. Though an investment would certainly have to be classed as reasonably high risk due to its small size.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Nanosonics Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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