FTSE small-cap technology-led plastics firm Carclo (LSE: CAR) updated the market today saying that it expects a strong year-on-year trading improvement when it reports full-year results on 10 June, but the shares fell 27% on the news. Why?
 Emerging growth from within
Exciting growth can emerge from within a company when a steady business develops a new product line. One example of that is what the Costa coffee brand has done for Whitbread, transforming the entire business into a vibrant grower. It’s no surprise that investors keep a look out for such opportunities, particularly in the small-cap space, where growth could have the furthest to run.
Expectations were high when Carclo (LSE: CAR) moved into the Conductive Inkjet Technology (CIT) touch screen business, and the shares moved up to accommodate a lofty forward P/E multiple in anticipation of  higher profits ahead. However, a trading update on 1 May revealed that the market for touch sensors is proving to be more competitive than was initially expected and selling prices have declined to half of prior year levels. That was enough to knock the shares down by around 27% to today’s 130p or so.
Getting it in perspective
So, growth in Carclo’s CIT division is going to be slower than expected. However, last year, the CIT division accounted for less than 1% of the firm’s revenue, with 65% coming from the Technical Plastics division, 26% from LED Technologies and 9% from Precision Engineering. CIT business isn’t yet dead and buried, and the rest of the firm’s trading is doing quite well. In the recent statement, the directors said they expect a strong year-on-year improvement in overall trading performance despite the reduction in previously anticipated sales in the CIT division.
 Trading has been steady in recent years:
| Year to March | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue (£m) | 87 | 81 | 89 | 93 | 87 |
| Profit before tax (£m) | 3.65 | 4.62 | 6.77 | 5.5 | 5.01 |
| Net cash from operations  (£m) | 6.33 | 2.55 | 5.8 | 9.06 | 9.83 |
Revenue and profits have been holding there own and there’s an encouraging upwards trend in operating cash flow. At the half-time stage for the March-2014 year, revenue and profits were up.
Valuation
At 130p, the shares are valuing the firm at about 18 times historical earnings and last-reported net debt is running at around 2.5 times last years’ operating profit, which seems controllable.
An investment now buys a company generating 60% of revenues from supplying  fine tolerance, injection moulded plastic components, which are used in medical, optical and electronics products. The remaining 40% comes from specialised precision components serving the premium automotive and aerospace industries, and from LED optics for supercars and other applications.
A big part of Carclo’s strategy is to develop new technologies and products to drive future growth. Â That hasn’t changed, but the shares just got cheaper.