Today's Falling Knife: Volex Slides 30%

LONDON -- Shares in Volex  (LSE: VLX  ) slipped over 30% from last night's close of 140.25 pence, with early morning trading seeing the price fall to 98.03 pence at the time of writing.

This follows a trading update in which the provider of cables for electronics manufacturers announced a "general softening of demand across all sectors as well as delays in specific project timelines." This has led Volex to revise its full-year-revenue forecasts to fall within the range of $470 million-$485 million, and full-year normalized operating profit to be in the range of $11 million-$14 million.

Management has revealed a three-point plan to improve profitability:

  • reductions in operating expenses actioned to date exceed the initial 10% target
  • underlying consumer gross margin improvements are on track
  • revenue pipeline continues to grow, but conversion to revenues delayed

Elsewhere within the company, further action is being taken to combat the reduced revenues and plans are under way to widen the scope of the cost-reduction initiatives, strengthen the senior sales leadership, implement programs to "better align the sales organization with current and future customer needs" and accelerate Volex's move to a higher-margin product portfolio.

In the trading update, the company also declared that former Fiberweb group finance director Daniel Abrams would succeed Andrew Cherry as Volex's group finance director and executive director of the board on Dec. 17. Karen Slatford, currently a non-executive director of the company, will assume the role of deputy chairman.

Encouragingly, the board also emphasized that the project delays does not include its largest customer. So with the response to the revised forecast, many private investors will be asking the question: "Is Volex a falling knife?" In the depths of the financial crash in 2008-2009, its share price hit a low of 16.5 pence; however, it recovered significantly to reach a peak of 377 pence near the end of 2010. 

Setbacks in small caps like Volex are not infrequent, but that's the risk you run when trying to spot growth shares. It may well have the potential to rebound, but would warrant further research from ambitious investors only! If you are keen to earn such handsome returns from fast-growing but higher-risk shares, this free Motley Fool report could help you on your way.

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