Why Xaar plc Crashed By More Than 30% Today

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: Shares in Xaar (LSE: XAR) tumbled in early trade by more than 30% following further cuts to its full-year revenue guidance. 

Previously, the specialist printer saw its stock fall by more than 20% in one day in late August after revising FY forecasts to £115m-£125m, blaming a slowdown in the Chinese property market which impacted Xaar’s ceramic tile decoration business.

Today, management indicated “a further decline in activity” in the market, causing a continued decline in orders, and now expects total revenue to be between 5% and 10% below the bottom of the previously announced range — it’s now anticipated to come in under £100m.

So what: The news is significant, as two thirds of Xaar’s sales in FY 2013 came from the ceramic tile market, of which almost half of the world’s ceramic tile output is reported as manufactured and consumed in China.

Management are taking action to reduce costs , which is “expected to result in a 15% reduction in operating expenditures”, while the possibility of redundancies amounting to c. 20% of the global workforce — around 160 jobs — is being discussed.

Chief executive Ian Dinwoodie commented:

“We are highly disappointed to have to make this level of cost reduction given the progress achieved over the last four years.  Our exposure to the ceramic tile market in China, which delivered such strong growth over the last few years, is now driving a reduction in our sales. This change re-emphasises the need for Xaar’s revenues over time to become more broadly spread across multiple markets and applications. Our competitive position remains strong through our established market leading products, recently announced offerings, and planned future launches.  Development efforts on both our Bulk technology and our Thin Film technology provide an excellent basis for our future success as the digitalisation of industrial and commercial printing continues”.

Now what: Clearly, the market was never going to be happy with this news, and the shares have fallen accordingly. For all its troubles, the dividend has remained intact and Xaar currently has a yield of 2.2%, covered more than five times. 

Whether China’s property market will recover in the near term is subjective; if it does, then today’s price of around 255p could represent a buying opportunity for a stock that peaked at 1162p little more than 10 months ago. However, three profit warnings have since sent the shares to their lowest price in close to two years, and investors will know that playing with knives — including this falling knife — is a dangerous game to play.