Earnings season has only just kicked off, but already there have been a number of shock updates, many of which have sent share prices plummeting.
One of the biggest shocks so far came from construction project software provider Aconex Ltd (ASX: ACX) earlier this week when it released a very disappointing earnings update, which ultimately sparked a flurry of valuation downgrades from analysts. The company downgraded its revenue and earnings guidance for the full-year, with expectations of roughly 21% growth in earnings before interest, tax, depreciation and amortisation (EBITDA). That compares to prior guidance of 62% to 84% growth, or 73% on average.
On the same day that Aconex released that update, Servcorp Limited (ASX: SRV) revealed its own bad news which sparked a swift sell-off of its shares. While the company had guided for full-year net profit before tax (NPBT) of at least $56 million, it now expects NPBT to be $47 million (although it did forecast a higher dividend than previously thought). The problems were caused in its South East Asia and USA business divisions, with $2.5 million of unplanned one-off expenses also incurred in relation to the restructure of the USA operations.
Virtus Health Ltd (ASX: VRT) also said that it continued to suffer from weak IVF cycle volumes, which it had previously reported early in November. In fact, it noted that its fresh cycle activity in Australia in this half had decreased by 7.2% on a like for like basis. While general market activity has played a role in this trend, low cost competition and market share losses have also contributed to Virtus' poor results. The company will announce its half-year results on 21 February.
International money transfer business OFX Group Ltd (ASX: OFX) and software business GBST Holdings Limited (ASX: GBT) both disappointed investors yesterday, as well. OFX, which previously traded as OzForex Group, announced another change of leadership while it also issued an earnings downgrade. The update caused its shares to lose almost a quarter of their value yesterday. Meanwhile, GBST's share price was also hit hard when it said its first-half EBITDA is expected to be $8 million. The full-year guidance of just $12 million EBITDA implies a weaker second-half of the year.
As investors, it is important to remember that every earnings period there are businesses that succumb to weak performances, so this month has not been (and will continue not to be) an exception.
While a bad earnings result can sometimes be a reason to sell a stock, what investors really have to stop to assess is whether their thesis has been permanently damaged. Indeed, a poor update could suggest something is fundamentally wrong with the business, or it could simply reflect a bad six months whereby the company is likely to bounce back. Although it can sometimes be challenging figuring out which category your company falls into, it is well worth taking the time to establish.
