The Australian Pharmaceutical Industries Ltd (ASX: API) share price is down 23% over the last 12 months. At today's prices, the stock trades at a forward p/e of about 12 with FY18 earnings per share estimated to be 12.6c by Morningstar.
What Happened?
In early August, Australian Pharmaceutical Industries issued a profit downgrade to the market. In the announcement, the company stated that it expected full year net profit after tax to be up approximately 5% compared to FY16.
The updated guidance was down from the minimum of 10% growth in net profit after tax management guided for in April, when the company delivered its half yearly numbers. The stock was promptly sold off from the $1.76 level and even reached new 52-week lows of $1.41 on September 26 before recovering slightly.
The amount of stock shorted has also increased post the August announcement from around 1% to the late September level of 1.7%.
The Issues
The company attributed the decline in full year profit guidance to a decline in consumer sentiment. Although the company has maintained its market share in the retail segment and transaction growth is up 4% compared to FY16, like-for-like sales have declined due to consumers spending less overall and placing more emphasis on lower valued items.
Pleasingly, API's pharmacy distribution network is on track to meet expectations and the company is expecting net debt to be positive before the close of 2017.
One must also wonder about the impact of Amazon on Priceline with the American retailer's imminent launch in Australia. Approximately 30% of API's revenue is from its retail segment, but it does deliver a significantly higher gross profit margin than the distribution part of the business.
The company's largest shareholder, Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has also decreased its owernship stake. In May, the investment conglomerate announced that it had sold approximately 25 million shares of API for an average price of ~$2.14, thus reducing its holding from 120.2 million shares and a 24.63% ownership stake to 95.1 million shares and a 19.41% ownership stake.
Foolish takeaway
The pessimistic sentiment has not been limited to API as key rival Sigma Healthcare Limited (ASX: SIG) has fared even worse by declining 42% over the last 12 months.
The negative sentiment in Sigma has amplified following its announcement in May that it's attempting to resolve a dispute regarding a breach of a supply agreement with a major customer, the My Chemist/Chemist Warehouse Group.
I think there is some value with Australian Pharmaceutical Industries at these prices, but would refrain from opening a position until the company announces its full year earnings and offers guidance for FY18 on October 19.
