Down 20% today: Why the GUD share price is crashing to a 6-year low

An old rusted car has nose dived from the sky to crash in the barren desert.An old rusted car has nose dived from the sky to crash in the barren desert.

The GUD Holdings Limited (ASX: GUD) tumbled to its lowest level since 2016 after its profit warning that prompted a leading broker to downgrade its shares.

The auto parts and water products manufacturer announced after the market closed yesterday that its FY22 underlying earnings before interest, tax and amortisation (EBITA) would come in at around $147 million.

That compares to its previous guidance of between $155 million and $160 million. The downgrade also sits around 10% below the census forecast.

GUD share price careens on downgrades

The GUD share price has crashed 20% to $7.67 at the time of writing, while the S&P/ASX 200 Index (ASX: XJO) is down 2.33%.

The profit downgrade prompted Citigroup to cut its recommendation on the company from buy to neutral.

The broker also lowered its price target by 36% to $9.95 a share. While the new target price implies a decent upside to where the GUD share price is sitting, that’s unlikely to provide much comfort to shareholders during these turbulent times.

Clouded by uncertainty

Citigroup explained:

We downgrade the stock to neutral reflecting increased uncertainty surrounding the earnings recovery, which is primarily reliant on OEM supply normalising, which may take longer than expected to recover and is outside GUD’s control. We also wait to see more evidence that gearing reduces from current levels.

GUD management blamed volatile supply chains, falling new vehicle sales and cost pressures for the downgrade.

The group has increased prices for its products and is planning to lift prices again in July and August, but this has yet to offset margin pressure.

Lack of new cars hurts GUD

Further, its ill-timed acquisition of AutoPacific Group is also hurting as new car sales volumes have been hampered by the lack of supply. This in turn is also dragging on its ECB (bullbars) and CSM (trays and fit-outs for utes) sales.

Citi said this news shouldn’t be a great surprise after competitor ARB Corporation Limited (ASX: ARB) issued a similar update last month.

One small bright spot

If there was a silver lining in GUD’s profit downgrade, it’s to do with the legacy auto parts business which the company said continued to see “solid demand”. Owners are forced to keep their vehicles for longer due to the shortage of new vehicles. This means more repairs and spare parts.

The readthrough is positive for the Bapcor Ltd (ASX: BAP) share price as well. Although this isn’t saving Bapcor from today’s brutal market sell-off, with its shares down 2.47% at $5.52.

The post Down 20% today: Why the GUD share price is crashing to a 6-year low appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ARB Corporation Limited and Bapcor. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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