Why the Cabcharge Australia Limited share price is sinking today

Credit: Thomas Hawk

Shares in taxi payment services provider Cabcharge Australia Limited (ASX: CAB) were among the worst performing on the ASX in Monday’s trade. The stock fell by more than 3% to give up all of last week’s gains.

Until today, Cabcharge shares had enjoyed a positive March, rallying off a 13-year low. But the fact remains that the stock has lost nearly half of its value in the last 18 months.

Why did this happen to Cabcharge Australia shares?

On Friday, S&P Dow Jones Indices announced the result of its quarterly index review.

Every three months, S&P Dow Jones assesses the stocks that make up each index it runs — the S&P/ASX 200 (INDEXASX: XJO) and the All Ordinaries (INDEXASX: XAO) index, for example.

Any given three-month period generally sees several stocks grow significantly, while just as many can fall on hard times and sink. These large rises and falls bring stocks into contention for addition or removal to indices.

Index membership makes a difference to a company’s share price prospects. Big fund managers are often mandated to buy every single stock in a given index, and that buying pressure can help those stocks on the buy list to rise.

By the same token, removal from an index can mean those big fund managers have less reason to buy a certain stock — or the fundies’ mandate may even require them to sell it.

That’s why investors watch the quarterly index rebalance closely. As is often the case with bad news, investors tend to sell first and ask questions later.

On Friday, the market saw S&P Dow Jones remove Cabcharge Australia from the benchmark S&P/ASX 200 index. Cabcharge joined similarly ill-fated stocks like Slater & Gordon Limited (ASX: SGH) and Ten Network Holdings Limited (ASX: TEN) in making way for rising stars like Bellamy’s Australia Ltd (ASX: BAL) and St Barbara Ltd (ASX: SBM).

Falls in share price, volume and general market relevance have knocked Cabcharge Australia out of the S&P/ASX 200 index and dented their investor appeal today.

What’s next for Cabcharge Australia Limited?

It’s hard to be bullish on Cabcharge Australia’s prospects from here. Its result for the six months ending 31 December 2015 saw statutory net profit after tax fall by nearly 22%. Surcharge reductions and stiffer competition from other taxi payment providers are making life harder for Cabcharge.

That’s to say nothing of the well-documented threat from ridesharing apps like Uber, which are seeing more and more passengers turn their back on traditional taxis entirely.

Although favourable regulation could help to stem Cabcharge’s bleeding, there is real potential for peak market share and peak profitability to have come and gone for the group.

On that basis, Cabcharge’s share price shrinkage looks justified — and it’s hard to recommend a purchase.

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Motley Fool contributor Tim Dohrmann has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Bellamy's Australia. 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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