Why the Pact Group Holdings Ltd share price has been SMASHED today

The Pact Group Holdings Ltd (ASX: PGH) share price has been one of the worst performers on the market with a huge decline in early trade.

At the time of writing the packaging company’s shares have fallen a massive 11% to $6.54.

What happened?

In a presentation at the Macquarie Group Ltd (ASX: MQG) conference, Pact downgraded its full-year guidance on the back of subdued demand and a particularly weak performance from its rigid packaging businesses in April.

Excluding any incremental earnings from acquisitions, management now expects FY 2017 earnings to be flat on last year’s result. Whereas in February management was expecting to deliver “higher revenue and earnings”.

Considering half-year net profit after tax (after significant items) rose 20% to $50.2 million, the sudden downturn in its performance will no doubt be a big disappointment for shareholders.

But it’s not just Pact shareholders that will be disappointed by this news. The share price of rival Orora Ltd (ASX: ORA) has also fallen heavily on the news today.

Should you buy the dip?

Even after today’s decline its shares are changing hands at approximately 20x forward earnings. I don’t believe this is great value for a company struggling to grow its bottom line.

Furthermore, I’m not a huge fan of companies which rely purely on acquisitions to fuel their growth. So for this reason I would avoid the company at this stage.

Instead I would suggest investors focus on other areas of the market such as the healthcare and information technology sectors.

These high-flying shares, for example, would be much better options for investors in my opinion. I expect them to grow earnings at a very strong rate over the next few years.

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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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