Tech stocks play X'mas Grinch

IT stocks are dragging on the Uncapped 100 today with UXC and Data#3 issuing profit warnings ahead of the festive season.

The Uncapped 100 is lagging the broader market today, no thanks to information technology stocks UXC (UXC) and Data#3 (DTL).

The technology consultancies are the worst performers this morning on downbeat earnings news with UXC suffering its biggest sell off in 3½ years of 11.7% to 94.5 cents, while Data#3 slumped 8.3% to a three-year low of 94 cents.

UXC warned yesterday that its first half profit will fall short of expectations even though it managed to increase sales by 5% to 6% due to one-off costs and margin pressure. Management is predicting earnings before interest, tax, depreciation and amortisation (EBITDA) of $11.5 million to $13 million and underlying pre-tax profit of between $7 million and $8.5 million.

The company posted an EBITDA of $14.5 million and pre-tax profit of $11 million for the same period last year.

UXC is also capitalising on the “Northern Exposure” theme we highlighted in Five small cap trends for 2014 this week when it announced the acquisition of North American business Tectura Corporation for $21 million.

Data#3 is another playing the Christmas Grinch with its profit warning this morning. Management blames delays in customer spending for its earnings slippage. Data#3 is now expecting pre-tax profit of $3.5 million to $4 million for the six months to the end of December compared with 2012-13’s interim figure of $9.8 million.

Investors had been bracing themselves for a profit drop, but the magnitude of the fall off has caught many off guard and raises doubts that Data#3 can live up to its full-year consensus earnings expectation.

Analysts polled on Bloomberg have pencilled in a net profit before tax of $17.8 million, which means Data#3 will have to deliver an exceptional second half performance to meet this. That is not likely even if management’s prediction of a much improved second half comes to fruition.

Interestingly, both companies are relatively upbeat for the six months to June 2014. Their outlooks indicate a 33%/66% income split between the first and second halves.

This means there’s a lot riding on the companies’ performance in the next six months, and if the ramp up in demand for IT services doesn’t materialise in that period, the sector could be set for a painful de-rating.

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