Is the golden run for early childhood education stocks over with Affinity Education Group Ltd (ASX: AFJ) crashing to its lowest point since its float a year-and-a-half ago and rival G8 Education Ltd (ASX: GEM) slumping to a January 2014 low?
The latest bout of selling comes on the back of a profit update from Affinity Education with management forecasting underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $27 million to $32 million for 2015 (the company's financial year ends in December).
That's below consensus estimates of $35.5 million and the news is reinforcing the belief that the childcare centre industry isn't as profitable as it used to be.
Shares in Affinity Education took a 34.8% beating to 53.5 cents during lunch time trade as G8 Education slipped 0.8% to $3.21 in sympathy.
Affinity Education's initial public offer was hyped up by the success of G8 Education, which had capitalised on the turmoil created in the wake of the collapse of ABC Learning during the global financial crisis.
G8 Education could acquire childcare centres in good locations on the cheap and its share price ascent looked unstoppable up till a year ago.
But the low hanging fruit is fast disappearing as competitors entered the fray and as the market became concerned about whether the aggressive acquisition strategy is sustainable.
Affinity Education's earnings guidance has given the bears courage as occupancy rates at its 161 centres in the June quarter have fallen relative to the same time last year even though occupancy rates have trended up to 77% currently from 72% in January.
Occupancy may flat line at this level and that has thrown some doubt on analysts' 15%-20% earnings per share growth assumption for both stocks for the 2015-16 financial year.
It's not all bad news though. Both stocks appear to be cheap after the sharp sell-off. G8 Education is trading on a price-earnings multiple of 10.6x and Affinity Education is trading at around 5x.
Both stocks are also forecast to yield well over 8% each before franking credits are added, although I suspect (and the market as well) that they could be dividend and value traps as the companies could announce profit downgrades over the next few months.
While some of this risk is priced into the stocks, I wouldn't buy either now because they are under an earnings cloud. It is better to wait for the confirmation before trying to pick the bottom for the stocks.
Remember there's seldom a first mover advantage in catching a falling knife.
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