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Has the market overreacted after Luceco delivers another profit warning? (LUCE)

A month ago, I highlighted the big drop in share price of LED lighting manufacturer Luceco (LSE:LUCE). The shares had hit 59p, and subsequently bounced to 90p, a 50% rise within a week. A profit warning and admission of error in calculating inventory values had come just weeks after CEO John Hornby sold £4.69m of stock at £2.34. In a trading update yesterday, the company has delivered a further double whammy of disappointing news.

Firstly, Luceco now anticipates reporting 2018 profit after tax will be in the range of £12.0-14.5m. The company blames the fact that trading conditions have remained difficult in our UK consumer facing business, as a result of well publicised weak consumer confidence and a weaker dollar.’

On a more positive note, the company points out that this only affects their UK consumer business which currently accounts for approximately 25% of group revenue. But this offers little comfort when you read more of the update and discover yet another error in reported profit for 2017 It has been downgraded further from £13.2m to £11m.  Don’t forget original market expectations prior to the calamitous December update were £16.7m.

The market is clearly not impressed, with the share price plummeting to a new low of 46p today.

Could this be an opportunity?

If all the bad news is out, this could well offer up a decent value play. At 48p the company appears significantly undervalued with a Market Cap of just £78m. That’s a P/E of 7 based on 2017 profit, and a forward p/e of less than 6 for 2018!

The risk is of course further disappointing news or errors, but are things as bad as they seem?

Hornby commented: ‘”I am extremely disappointed by these developments. However, most parts of the business continue to grow strongly, highlighting the benefits of our long-term diversification strategy.  Our margin mitigating actions outlined in our December update are on track to deliver the expected margin improvement during H2 2018.”

Providing a company is generating profit and has no immediate requirements for funding there is little reason for them to be concerned about day-to-day share prices movements. However, every shareholder who bought in the Secondary Market must be holding a losing position at the moment, and that’s in stark contrast to a director having just sold stock at near record highs.

In fact, Luceco shares are now available at a staggering 80% discount to the price the CEO sold at around 3 months ago. It’s going to likely require a continuous flow of positive news to reverse sentiment here after such a run of disappointment, perhaps a director share buy would be a good start?

Chart-wise, 46p offers some level of support based on the current suggested price channel, and the Relative Strength Index (RSI) is screaming oversold. Even a doubling of the current share price to 98p would only equate to a P/E of 14 based on the most recent quoted profit figures for 2017, but investor faith will need to be restored.

Author: Stuart Langelaan

Disclosure:
The author of this piece owns shares in the company written about above

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