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I FTSE 250's Kainos (LSE: KNOS) entered this morning (2 September) on the release of a disappointing trading statement.
As I write, the Information Technology (IT) provider's stock is down more than 15% since the market opened.
That kind of move is uncomfortable for existing shareholders, but is the sudden drop in price now an opportunity for investors to consider buying more shares?
Decreased revenue, retained earnings
Today's update covers the period from 1 April to date and also contains guidance for the full trading year to March 2025.
The directors think that the net income for the year will be in “below current market consensus forecasts”.
That statement likely caused the stock to swing lower. With any company, the market tends to look forward. So a better forward trade was probably baked into the share price – driving it higher – and that may be relieving now.
However, this is not a complete disaster of a trading statement. Adjusted profit before tax looks set to end the year in line with expectations. However, there was a “strong” a trading post in the company's Digital Services division. That means directors expect a “small” increase in total revenue for the full year.
Growth is not as fast as previously expected, but business is not slowing down. If this slow move proves to be holding it back for a while, today's low valuation may be a good time to use the counter on the job.
With the share price close to 937p, the forward price-to-earnings ratio is still very small after accounting for double-digit percentage growth in future earnings.
So this one is rated as a growth share and could fall even further if those profit projections fail to materialize.
Valuation risk is perhaps one of the biggest uncertainties for Kainos because even after today's fall, the stock is much higher than the lower floor.
Growth and opportunity ahead
In the overall business, there was slight weakness in the Digital and Business Day Services segments. But the Workday Products category “continues to deliver very strong growth”. So it's a bit of a mixed bag.
However, directors are looking ahead “with confidence”. There is a “healthy” opportunity pipeline and a “important” they say so. The business is well positioned in its core markets, and they are “big” they emphasize multi-year growth opportunities in all categories.
On balance, despite the risks, I think it's a good time to be interested in Kainos. The business is still growing, and it operates in a sector that often produces long-term stock market winners.
My plan now will be to keep an eye on stocks with a view to doing more research. If I can't find hidden negatives, this is the type of business I'd like to own as part of a diversified portfolio.
We'll hear more from the company in its half-year report due on November 11.
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