Investors are ditching shares in electronics components designer and manufacturer Stadium (SDM:AIM) like hot potatoes after becoming the latest in a string of companies to issue a profit warning. The alert has emerged after a significant wireless customer in the telematics industry decided to move product design in-house and manufacturing elsewhere.
Stadium says the customer cancelled because its own regional design centre expansion was not happening quickly enough, and this will delay anticipated growth.
That news has sparked a huge investor reaction, the share price collapsing by 28% to 79.5p.
But a vital point here is that this appears to be a one-off event, not a fundamental problem with Stadium's core strategy. Analysts at broker N+1 Singer admit as much themselves, while also flagging that they believe that the company is doing the right thing by increasing its regional design centres to match the flexibility customers are now demanding.
There is another important point to make, about the profits impact. Yes, adjusted pre-tax profit estimates have been slashed by N+1 Singer from the £5.5 million previously anticipated for the full year to 31 December 2016 to £4.3 million, but this will still be ahead of 2015's £4 million return.
Bolstering confidence in the company's ability to bounce back fairly quickly is a robust order book worth around £28 million. That's about £9 million higher than at the end of 2015, and around 20% up on the equivalent figure wheeled out at the time of prelims in March, largely driven by a strong performance on its higher margin technology product side, itself worth about 60% of sales.
Stadium's plan to increasingly switch away from contract manufacturing, where costs are constantly under pressure from low cost labour markets overseas, to a inhouse, design-led strategy remains the right move, so it is pleasing to read that faster than expected declines on its EMS (Electronic Manufacturing Services) side are largely being counter-balanced by operating cost cuts.
This should mean an increasingly flexible cost base, helped by recent acquisitions, giving management more options on efficiency and productivity that will, hopefully, lead to more consistent longer-term growth down the line.