The Pact Group Holdings Ltd (ASX: PGH) share price is getting flogged after management issued a profit downgrade this morning.
Pact Group’s shares plunged 12.5% to a record low of $3.15 in morning trade – making it the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index with the Worleyparsons Limited (ASX: WOR) share price and Beach Energy Ltd (ASX: BPT) a distant second and third with losses of around 6% each.
The big question is whether Pact Group stock is looking cheap given that the drivers for the profit warning appear to be temporary in nature.
The sell-off was triggered by the packaging company’s revised earnings guidance for FY19, which is forecasting earnings before interest, tax, depreciation and amortisation (EBITDA) of around $245 million.
This compares to its initial EBITDA guidance of between $270 million and $285 million, although the downgraded guidance is still ahead of FY17’s figure of $237 million.
The group blames an ongoing lag in recovering higher than expected resin and other input costs as one big driver for the downgrade. A one-month delay in the settlement of its acquisition of TIC Retail Associates has also contributed to the weaker-than-expected earnings forecast.
Whether the price drop proves to be a buying opportunity will largely depend on management’s ability to pass on the increased expenses to its customers. The fact that it has so far been unable to could indicate a lack of market power for Pact Group.
But what may save the group from more pain is the tumbling oil price (hence why the Worleyparsons and Beach Petroleum share prices are crashing too). Resin is a by-product of petroleum and is correlated to the crude price. Higher oil prices also feed through the entire industrial supply chain as it drives up the cost of fuel.
If the oil price stays weaker for longer, it will bring some relief to Pact Group although I think oil will be heading up again soon.
This makes it all the more important for management to push through price increases if it wants to win back investors.
Interestingly, the profit warning hasn’t infected its peers. The Amcor Limited (ASX: AMC) share price is trading flat at $13.56 while the Orora Ltd (ASX: ORA) share price shed a modest 0.5% to $3.24 at the time of writing.
That isn’t so bad given that the top 200 stock benchmark is also down 0.5%.
I would hold off buying Pact Group for now as there are still too many questions about its cost recovery strategy.
There’s also the market saying about how profit downgrades come in threes.
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Motley Fool contributor Brendon Lau owns shares of WorleyParsons Limited. 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 Scott Phillips.
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