Will Mcgrath Ltd issue another profit downgrade next month?

Today's recovery in Mcgrath Ltd's (ASX: MEA) share price could be a dead cat bounce. There's speculation that the group may not be able to avoid another profit downgrade.

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Shares in embattled property agent Mcgrath Ltd (ASX: MEA) may have appeared to have found a floor with its share price firming 2% to 51 cents in late afternoon trade today, but there are growing worries that the company may not be able to avoid yet another profit downgrade when it hands in its profit results next month.

The latest sell-off stemmed from yesterday's profit warning and the shocking news that just about the entire board, including the chief executive officer, had resigned – effectively handing back control of the company to its founder and executive director John McGrath.

They say profit warnings come in threes, although in McGrath's case it could be a pack of five.

The stock has crashed around 37% over the past 12-months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 7.7%, and is worth less than a quarter of its initial public offer (IPO) price of $2.10 after management delivered four profit warnings over the past two years.

If you thought QBE Insurance Group Ltd (ASX: QBE) was bad in terms of disappointing on profits, the string of downgrades for McGrath may not be over. There is speculation that yesterday's profit warning still leaves a too optimistic picture for group earnings, according to a report in the Australian Financial Review.

McGrath said that underlying earnings before interest, tax, depreciation and amortisation (EBITDA) will come in at $1.63 million in the first half of FY18. But if you included one-off costs, the group will post a loss of $50,000.

On a full year basis, management (or what's left of management) is expecting underlying EBITDA to range between $10.6 million and $11.6 million.

But undisclosed sources have told the AFR that the range is too high. McGrath's earnings per month during its best season is about $270,000.

Ignoring any seasonal weakness and extrapolating this, annualised EBITDA should be around $3.2 million. If you included the $5 million in cost saving, it should bring underlying EBITDA up to just over $8 million.

It doesn't help that management's credibility is also in tatters. It is anyone's guess what caused the mass resignation, but I can tell you it won't be for "family reasons" – an excuse used by online property classifieds company Domain Holdings Australia Ltd (ASX: DHG) to explain the sudden exit of its CEO.

The only logical explanation for McGrath is in-fighting and history has shown that the damage done under such circumstances can't be easily or quickly resolved, despite what high profile realtor John McGrath said as he tried to calm panicky investors.

McGrath looks like a dead-cat bounce and I would be selling the stock into any rally and rotating into Domain (find out why Domain could be a buy by clicking here) or its more established rival REA Group Limited (ASX: REA).

Alternatively, there are three other industry disruptors that the experts at the Motley Fool is recommending you put on your watchlist for 2018.

Click on the free link below to find out what these stocks are.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. 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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