Investors take Industrea to the woodshed

After reported disappointing earnings Industrea (ASX: IDL) was taken out to the woodshed and mercilessly pummelled by investors on Thursday. Industrea …

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After reported disappointing earnings Industrea (ASX: IDL) was taken out to the woodshed and mercilessly pummelled by investors on Thursday. Industrea shares fell 23 per cent after first half earnings failed to live up to either expectations or last year’s corresponding period.

Net profit of $15.1 million was 14 per cent lower than last year’s $17.5 million, despite revenue and EBITDA being marginally higher than a year ago. The company said a higher tax rate and increased depreciation caused the earnings shortfall.

As both tax and depreciation are easy to forecast investors are right to be sceptical of those excuses. I’m not surprised that investors dumped their shares. Shoot first, ask questions later is often the right approach in these situations, especially when the company has a track record of disappointing investors.

It was only a few months ago at the mid November AGM, that CEO Robin Levison was spruiking 20 per cent revenue growth in 2012. As the first half was two thirds completed at that point, management should have had a good idea of performance and should have informed the market.

Levison is sticking to his guns and stated that the second half will be strong.

“We are confident of achieving a stronger revenue performance in the second half and that full year profit will lift given the underlying strength of the markets we operate in, and the continuing improvements being made to our businesses’ operational efficiencies.”

While the second half may be strong I doubt it can come to the rescue and make those lofty 2012 growth dreams a reality.

I love the smell of opportunity in the morning

The $240,000 question is whether Industrea is now a bargain, or does it smell rotten.

You may recall that Industrea was one of two Australian companies selected by The Motley Fool’s Global Gains team during their visit to Australia about a year ago. The special report is available here and a brief summary is below.

Plans by miners in Australia and China to increase production will drive growth for all three of Industrea’s businesses. The opportunity to sell equipment in China and earn recurring service revenue is particularly promising given China’s need to mine coal safely and efficiently.

This is a niche business with significant growth opportunities and a track record for rewarding shareholders. We’ll be watching Industrea’s profit margin and the way the company manages its balance sheet, but in the meantime, this could be a compelling way to profit from the rising demand for commodities in emerging Asia.

Net margins were crushed this half, falling to 8.6 per cent compared to 13.4 per cent in 2011. That doesn’t bode well for the future, but if management are to be believed it is a temporary fall that will be turned around this half. In light of the recent record, that is a big if!

This isn’t the first time Industrea have overpromised and under-delivered. The company also disappointed investors back in 2009. Back then the initial sell-off was the just the beginning of a long slide in the share price.

Cash flow is also concerning, as despite a handy $24.5 million in operating cash flow, the company spent $37.7 million on investing activities. Most of that was for property plant and equipment, so is an investment in future growth, but in light of the disappointing results it’s worth keeping a close eye on future cash flows to ensure Industrea is once again self-funding (able to grow without extra debt or equity).

Foolish Bottom Line

At under $1 Industrea’s shares appear cheap and are priced as if the company will never grow again. That seems highly unlikely considering the massive growth tailwinds it has behind it. However, with plenty of other opportunities in the market I see little reason to jump in now. Fortune seldom favours the brave in investing, while patience is very rewarding.

If you’re looking for a business we think is worth your consideration, check out The Motley Fool’s Top Stock For 2012. Request your copy of this report, whilst it’s still free and available, by clicking here now.

More reading

Motley Fool Investment Analyst Dean Morel does not own shares in Industrea.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »