Transpacific under review
- Grounding of fleet to cost $20m
- Management tight-lipped about impact of falling commodity prices
- Switching to Under Review
Last week Transpacific Industries announced that the cost of grounding its fleet following a fatal accident involving one of its trucks would be $20m. That came as no surprise to the market, yet the stock price has fallen 11% since then.
Transpacific benefits from lower fuel prices, but as it's heavily exposed to the resources sector the fall in the share price is not surprising given the remarkable fall in oil and other commodity prices. We've been trying unsuccessfully to quantify what impact the market is expecting, that is until one of our members (thanks Michael!) emailed us with one broker's view that expected earnings per share could drop nearly 20% in 2015.
That's quite possible, as small changes in revenue can have a large impact on Transpacific's profits because of its high fixed costs. If it proves correct, then management should've come clean in last week's ASX announcement. Putting our sceptic's hat on, while there probably won't be much impact on the interim result to be announced in February, the sting in the tail of the announcement will be a full-year profit downgrade, potentially creating a better buying opportunity.
Not wanting to fall into the trap of becoming market timers, in the past our approach in these cases has been to ignore the potential for earnings downgrades created by short-term cyclical factors, like the lower oil price, and focus on the long-term value that we see along with a bunch of other highly successful value investors currently on the share register.
But with management remaining tight-lipped despite a profit downgrade seeming more likely by the day, we're switching to UNDER REVIEW until we receive the interim result and more candour from management about the lower oil price's impact on profits and how it's reacting.