FTSE 100 stocks with multi-billion market-caps don’t usually see large single day share price movements. Therefore, when I spotted one that was down 18% in early morning trading today (11 September), I immediately jumped on it. Sometimes investors can panic sell, meaning that the move in the stock is an overreaction. Here’s what I discovered.
What drove the move
The stock I’m referring to is Rentokil Initial (LSE:RTO). The share price is down 19% over the past year (excluding the move so far today). Put another way, it’s on track to lose as much in value today as it has for the rest of the past year combined.
Clearly, something has surprised investors here to warrant the sudden share price move. This can be put down to the trading update just released, where it flagged up issues in North America. In this market, “trading performance in July and August was lower than anticipated”.
As a result, the firm’s revised down the full-year adjusted profits before tax and amortisation figure. Previously, investors had been guided toward a figure of £776m, which was comparative to the £766m it made last year. However, the revision lower means it now expects to make about £700m.
The fact that this is over a 10% reduction based on underperformance in just one market over the course of a summer isn’t a great sign. One factor that goes into a share price is the earnings per share. So naturally, a lower earnings per share for this year would act to adjust the share price lower.
Not a short-term fix
The £2bn wiped out in market-cap is a lot. However, I need to figure out if this is just an overreaction or the start of a broader move lower.
The concern I have is that some of the factors driving the weak performance could take some time to fix. For example, one issue was that “spend on materials and consumables” was higher than expected. If this is due to inflation or other reasons, it’s unlikely that this spend will materially decrease going forward.
Another point that was flagged was “lower than expected lead flow and sales growth”. This is a bit worrying, as it suggests demand for Renoktil products isn’t that strong. This can be fixed through innovation, marketing etc but it can’t be fixed overnight.
Action being taken
Despite these problems, the business is aware that work is needed. This is a good sign for investors. The management team has set up its ‘Right Way 2 Plan’ initiative, which is focused on sales conversion and customer retention. As a result, benefits should be felt in the future, which could allow the financials to improve.
Let’s also not forget that Rentokil still expects to be profitable to the tune of hundreds of millions of pounds this year. We aren’t talking about a company that’s losing money or even close to it! So expectations need to be managed carefully to avoid too much pessimism.
Overall, I feel the problems flagged up in the trading update could take some time to solve. Therefore, I’m going to stay away from investing at the moment. But I’ll keep a close eye on things.
This post was originally published on Motley Fool
