It would appear companies not hitting their profits is the new normal.
We’ve seen a few of them already this reporting season. No doubt these stories will continue to roll in.
The latest culprit in Downer EDI Limited [ASX:DOW].
They had to cut their full-year profits guidance by $65 million.
That’s a fair whack. Turns out costs are rising faster than expected.
Investors weren’t happy about this. The Downer EDI share price moved 22% lower at the open.
But there’s an interesting story here. I’ve got something to show you.
Before I tell you what that is, let’s cover the basics…
Who is Downer EDI LTD [ASX: DOW]
I won’t lie to you…they’ve got a pretty confusing business model.
It’s engaged in the ‘provision of integrated services’.
What’s important to know is that the company is in the engineering and construction industry.
It covers sectors like transport, utilities, rail, and engineering. As well as construction, maintenance, mining, and spotless.
See, I told you the company is a bit confusing.
Just know that they provide engineering and construction services across those sectors.
Anyway, the company isn’t small.
It hires around 53,000 employees and has more than 300 sites.
These sites are located across Australia and New Zealand. But also stretch as far as Asia, South America and South Africa.
With a share price of $6.92 and 591.318 million shares outstanding. It gives the company a market cap of around $4.09 billion.
That’s over $1 billion dollars lower than it was just yesterday.
So why the downgrade and could investors have prevented a loss like this?
Interesting question…let’s find out.
This is a downgrade
I’ve got a chart to show you.
But first, I wanted to let you know what Grant Fenn said…
‘It has now become clear that the costs incurred during December and January materially exceeded the company’s estimates and, in addition, a detailed review of customer claims and variations has reduced revenue recognised to date’.
Grant is the CEO and managing director of Downer.
As a result, the company has moved down their profit guidance from $365 million to just $300 million.
This caused the share to be sold down today.
I’ve attached the chart below. Look at it.
Source: Trading View
What you’re looking at above is the chart of Downer EDI.
It’s a daily chart and goes back to 2017.
I’ve highlighted three points.
Two with a red arrow and one with an orange arrow.
Let’s cover the orange first…
That’s today’s market action. You can see the fall was quite dramatic.
It was around 20% lower than the close just yesterday.
The problem I have here though is DOW has a history of gapping lower.
A gap is when there’s a sizeable difference between yesterdays close and todays open.
You can see the gap in the share two times. Just look at the two red arrows.
This tells me that DOW has a history of such moves.
The point being…it may also indicate that it will continue to have these kinds of moves.
It’s just something to be aware of.
As always, this is not a recommendation to buy or sell DOW. It is an update only. I hope you found it useful.