The FTSE 250‘s Kainos (LSE: KNOS) plunged this morning (2 September) on the release of a disappointing trading statement.
As I write, the Information Technology (IT) provider’s stock is down by more than 15% since the market opened.
That kind of move is uncomfortable for existing shareholders, but is the sudden reduction in price now an opportunity for investors to consider buying some of the shares?
Revenue slowing, profits held
Today’s update covers the period from 1 April until now and it also contains guidance for the full trading year to March 2025.
The directors reckon overall revenue for the year will likely come in “below current market consensus forecasts”.
That statement probably caused the stock to adjust lower. With any company, the market tends to look ahead. So better forward-looking trading had likely been baked into the share price — pushing it higher — and that may be unwinding now.
However, this isn’t a total disaster of a trading statement. Adjusted profit before tax looks set to end the year in line with expectations. However, there’s been a “tougher” trading environment in the firm’s Digital Services division. That means the directors expect only a “small” increase in overall revenues for the full year.
Growth isn’t as fast as previously expected, but the business isn’t declining. If this slow-down proves to be a temporary setback, today’s lower valuation may be a decent time to run a calculator over the operation.
With the share price near 937p, the forward-looking price-to-earnings rating is in the high teens after accounting for estimates of double-digit percentage growth in earnings ahead.
So this one’s rated as a growth share and may fall further if those profit assumptions fail to materialise.
Valuation-risk is perhaps one of the biggest uncertainties with Kainos because even after today’s fall, the stock’s several floors higher than the bargain-basement.
Growth and opportunity ahead
In the overall business, there’s been a bit of weakness in the Digital and Workday Services divisions. But the Workday Products division “continues to deliver very strong growth”. So it’s a bit of a mixed bag.
However, the directors are looking ahead “with confidence”. There’s a “healthy” pipeline of opportunities and a “significant” contracted backlog, they said. The business is well-positioned in its core markets, and there are “substantial” multi-year growth opportunities for all divisions, they insisted.
On balance, and despite the risks, I reckon it’s a good time to become interested in Kainos. The business is still growing, and it operates in a sector that often produces long-term stock market winners.
My plan now would be to put the shares on close watch with a view to carrying out deeper research. If I can’t find any hidden nasties, this is just the kind of business I’d like to own as part of a diversified portfolio.
We’ll find out more from the company with the half-year report due on 11 November.
The post Down 15% on news day, but should I buy this FTSE 250 stock now? appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
