- The announcement sent the share price falling to just 88p
Spirent Communications’ (SPT) share price collapsed last week after a profit warning shook investor confidence in management's statements. Just two months after reaffirming its full-year guidance, the company warned of falling revenue and “materially” impacted operating profit.
It had flagged that there would be a bigger weighting towards the second half of the year but said there were signs of improvement in customer confidence. "We are seeing increasing customer engagement and an improving pipeline,” said chief executive Eric Updyke at the time.
At this point, the first month of the quarter (July) had already passed and management should have had good visibility of August and September's pipeline. However, just two months later, Spirent published a trading update saying: “Order intake momentum experienced in the second quarter did not continue into the third quarter” and that revenue for the first nine months of the year would be down 20 per cent.
This announcement sent the share price down a third to 88p. The company was trading at 265p at the start of the year.
Numis broker John Karidis downgraded the company to hold in response and cut his target price from 275p to 95p. He said investors were right to abandon the company. “Cleary, Spirent’s early warning system failed but it didn’t stop Spirent from reaffirming guidance despite a poor first half and knowing that trading in July and August each year is typically thin,” he said.
At the start of the year, he wrote a note titled “Why Spirent is a structural growth stock” with a thesis revolving around 5G infrastructure. More towers would mean more testing, which is Spirent's business.
It seemed at the half-year point that his view might be right. But he has now dropped the revenue and adjusted operating profit forecasts for the coming three years by 21 per cent and 57 per cent on average. "The company has much work to do to rebuild confidence for market forecasts to change again to reflect the positives we cite," Karidis added.
Beyond the reliance on an uptick in sales in what Spirent now says is an "extremely challenged" telecoms market, the company continued a share buyback programme to completion on 24 August. In that week, Spirent spent around £4mn on buybacks, at an average price of 152p a share.
The company was clearly hoping for a strong September to get it back on track, but when this didn’t materialise it had to announce the bad news to the market. "A slow summer and disappointing September meant that we fell materially short of our expectations for the third quarter," said Updyke.
Even if Spirent’s fortunes do turn around next year and the 5G buildout increases revenue, investors would be smart to wait for proof before believing it.
