Early last week, Speedcast International Ltd (ASX: SDA) issued a profit downgrade for both its half-year and full-year earnings. The company cited several reasons for the downgrade, which saw its share price plunge nearly 49%. However, the market may have overreacted to the news, which could make the Speedcast share price a potential buying opportunity.
Profit downgrade
A leader in remote communication and IT solutions, Speedcast serves more than 2000 customers across 140 countries. The company operates across four segments: maritime, enterprise and emerging markets (EEM), government and energy.
Last week, Speedcast provided a downgrade to its earnings expectations for both the half- and full-year. Speedcast expect earnings before interest, tax, depreciation and amortisation (EBITDA) to be US$60–$64 million for the first half of 2019. For the full year, Speedcast downgraded EBITDA expectations by US$20 million to US$140–US$150 million, following previous guidance of US$160–US$171 million.
The news came as a surprise to some investors after Speedcast had reiterated its profit guidance in their AGM in late May. As a result, the announcement saw $340 million wiped off the company's value with the share price plummeting to a 52-week low of $1.665.
Why the downgrade?
It seems as if some investors may have premeditated Speedcast performing poorly, with the company being the 16th most shorted stock on the ASX with a 9.31% short holding. Management attributed the downgrade in half- and full-year earnings to many factors, including weak market conditions, expected revenue delays and lower expected earnings from their recent Globecomm acquisition.
The EEM segment experienced lower than expected earnings growth due to weak market conditions and delays to expected revenue from phase 2 of the NBN. The maritime segment is also expected to underperform with modest growth due to major contract churn. Speedcast also flagged lower revenue from its energy segment due to social unrest in Mozambique.
Speedcast acquired remote communications company Globecomm late last year for $135 million in a bid to expand the company's presence in the defence market. The company revised Globecomms contribution to EBITDA to US$21 million, US$5 million less than anticipated. Speedcast cited delays to government system integration projects and lower revenue in maritime as the cause.
Is it a buy?
While the Speedcast share price plunged nearly 50% last week, it has now bounced nearly 13% from the low. Despite the bounce, I would not be rushing to buy shares in Speedcast just yet. On face value, a nearly 15% decrease in earnings guidance should not warrant a 48% fall in share price; however, these concerns over revenue could continue into 2020. It is also important to keep in mind the large short holding in the company – the initial bounce could be investors who are short the company taking profit.
In my opinion, the chance to buy shares in Speedcast for an oversold bounce may have passed in the short term. A more prudent strategy might be to wait for the share price to consolidate over the next few weeks before deciding whether to buy shares in the company.
