As a fan of the company and one-time holder of its stock, today’s tumble in the Avon Protection (LSE: AVON) share price has really taken me by surprise. What’s behind this huge fall? Moreover, should I be tempted to load up while others are running for the exits?
AVON share price: what gives?
Today’s trading update from the self-styled “innovative technology group” certainly started well. The company said it had seen “good commercial progress” in the second half of its financial year. Indeed, order intake hit $221m in the 10 months to the end of July. This was an increase of 13% on that achieved over the same period in 2019/20.
From this point however, things take a serious dive. Like many other businesses, the producer of “life-critical personal protection systems” for military customers and first responders has been impacted by issues with its supply chain. A “tight US labour market” following the pandemic hasn’t helped matters.
As a result, the company has been forced to cut its full-year revenue guidance. This is now predicted to come in between $245m and $260m due to orders not being received (and those received not being shipped). As one might expect, this reduction in revenue also has a knock-on effect on margins. These are now likely to fall to between 17% and 18% for the full year.
To make matters worse, AVON believes the aforementioned issues will “persist into next year.” Accordingly, revenue forecasts have been slashed for FY22 as well ($320m-$340m). Mercifully, FY23 guidance remains untouched… for now.
Opportunity… or warning?
For a company that makes products designed to provide safety for those wearing them, Avon Protection was offering little comfort to its investors this morning. However, I wonder if today’s crash to the share price provides long-term growth investors like me with an opportunity.
Let’s run through some potential chinks of light. While we don’t know for sure how long these issues will last (and the market hates uncertainty), Avon Protection does expect recent disruption to be temporary. Margins will recover and the unexpected build-up of inventory will go out to customers eventually.
I fully expect the issues surrounding product approvals at its Military Ballistic business to be resolved as well. Investors have known about these for some time now. It was these that put the AVON share price in reverse since last December. Naturally, ongoing concerns relating to new variants of Covid-19 haven’t boosted sentiment around the stock.
Aside from all this, the FTSE 250 constituent is still a leader in a niche market producing essential equipment. I think this sets it apart from another heavy faller today. In fact, I wonder if today’s dip might attract the attention of potential suitors. After all, we’re seeing a lot of consolidation in the defence sector right now.
A tempting buy
Far from scaring me, today’s fall is actually tempting me to get involved again. Even so, I wouldn’t necessarily go ‘all in’ at this level. Since there’s still potential for things to get worse before they improve, I suspect it would be better for me to take a starter position today. After all, there’s always a chance guidance will be lowered again.
I need the outlook to become a little less foggy before thoroughly committing myself.
The post The AVON share price just tanked 25%! Here’s what I’m doing about it appeared first on The Motley Fool UK.
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Paul Summers has no position in Avon Protection. The Motley Fool UK has recommended Avon Protection. 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.
