Why the ALS Ltd share price dropped like a stone today

The shares of ALS Ltd (ASX: ALQ) fell off a cliff today, dropping over 12% to $3.94 at one stage following the release of the testing and analytical service provider’s annual results for the period ending March 31 2016.

The company revealed that full year revenue was down 4% to $1,365 million from the $1,422 million recorded in FY 2015. Whilst this is by no means good, it was the bottom end of the income statement which appeared to have investors heading for the exits in droves.

Although the company’s life sciences segment generated record revenue and operating profit, the poor performance of its minerals and energy segments meant the company booked a full year statutory loss of $241 million.

Excluding one-off items, ALS’s underlying profit was down 27% to $99.5 million, compared to the underlying profit of $135.4 million in FY 2015.

The ongoing volatility in the oil and gas sector also caused a $314 million impairment charge against its oil and gas investments.

Which is a real shame considering the strong performance of its life sciences segment. This segment has been growing revenue and gaining market share in all regions, according to managing director Greg Kilmister.

Although the company is working to try and diversify its business, it still has a large amount of exposure to the oil and gas sector through its minerals and energy segments. In the latest results these two segments accounted for 40% of total revenue.

But management did reveal that it is working hard on cost-cutting in the energy segment, with the aim of getting it to breakeven status in September. If it can achieve this, then I expect the overall business performance to pick up in the the next financial year.

It will no doubt hope that the recent rise in oil prices to around US$50 per barrel will not be short-lived. Time will tell if these prices are sustainable and enough for ALS to see any uptick in demand for its services.

Much like an investment in BHP Billiton Limited (ASX: BHP) and Oil Search Limited (ASX: OSH), I feel the current state of the energy sector makes an investment in ALS a little too risky for my liking.

Foolish takeaway

If I could invest purely in its life sciences segment I would be fighting to get my hands on it. This segment is producing strong results and market share growth. But unfortunately unless it decides to spin it off, that won’t happen anytime soon.

Instead I would turn my attention to this quality share. Rated the top dividend share of 2016 by the Motely Fool's dividend guru, I believe it could offer share price gains on top of the fully franked dividend it pays.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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