Looking at SEEK Limited (ASX: SEK) is like watching a train wreck after management shocked the market with a profit warning this morning.
Shares in the online jobs website crashed 9.9% to a 16-month low of $14.87 in early trade on news that the company will not be able to meet its previous guidance issued four months ago.
While revenue growth for the second half of the current financial year is still expected to be "solid", earnings before interest, tax, depreciation and amortisation (EBITDA) is tipped to grow less than revenue, while net profit will be broadly in line with the first half.
This compares with management's earlier outlook that told shareholders to expect "solid growth" in both revenue and EBITDA and for "moderately higher" second half net profit versus the first six months to end December, 2014.
Management is blaming TAFE New South Wales for the weaker-than-expected result as Australia's largest vocational training provider is suffering from information technology (IT) issues that resulted in "incomplete enrolments and very high withdrawal rates".
SEEK has a partnership arrangement with TAFE NSW and it is unclear if the training provider has resolved the IT stuff-up as earlier reassurances from the institute have proven to be misleading.
What's more, growing competition and reforms in the Vocational Education and Training sector in the wake of the Vocation Ltd (ASX: VET) debacle are not helping either.
While the reforms won't impact on SEEK directly, they will have a negative impact on the company's partners.
Interestingly, SEEK tried to reassure shareholders that the bad news is "one-off issues" but that may be an optimistic call given that the company itself admits the TAFE NSW problem is an ongoing issue with no resolution date.
Further, management can't articulate what impact industry reforms will have on its training partners and the competitive environment is unlikely to change anytime soon.
Against that backdrop, management is telling the investment community to tone down their expectations for 2015-16 and said it will provide a more detailed outlook in August when it releases its full year result.
Prepare to see some big downgrades by analysts. Consensus was expecting around a 14% increase in net profit for 2014-15 to $202 million and a further 22% uplift for the current financial year.
Management's new guidance implies a bottom line growth of about 6% for 2014-15 and I think growth expectations for this year will be pared significantly as SEEK will have to invest heavily in its business to drive growth.
It's not all bad news for SEEK as it has growth options but the key issue for shareholders is that the stock is trading at a high premium to the market as investors have assumed strong growth over the next few years.
Based on today's guidance, the stock is still on an estimated lofty price-earnings (P/E) multiple of around 27x for 2014-15. This means more room for a further de-rating of the stock.
The stock will need to fall to $10-$11 before it will start to look attractive to me.
