The shares of Brambles Limited (ASX: BXB) have dropped sharply in morning trade after the operator of the world's largest pallet pool issued a profit downgrade due to weakness in its North American business.
Brambles dropped 15% to $10.42 at the open, before recovering slightly to be down 13% at the time of writing.
According to the release the company expects to announce constant-currency sales growth and underlying profit growth of 5% and 3% respectively for the six months ended 31 December 2016.
Brambles' CEO Tom Gorman has blamed the result on the North American pallets segment which has lagged behind the rest of the business.
He revealed that the segment has experienced revenue and cost pressures due to US retailers destocking. This impacted volumes and resulted in an increase in transport and plant costs associated with the higher level of pallet returns.
Furthermore, the company has seen a deferral of potential customer conversions to pooling in North America, as well as pricing pressure across its recycled pallet operations.
As a result of the weak first half, management expects to fall short of its previous guidance. Constant-currency sales revenue growth was expected to be between 7% and 9%, with underlying profit growth coming in between 9% and 11%.
Management intends to clarify its amended full year guidance when it announces its half-year results on February 20.
In November I warned that its shares looked a little on the expensive side with these growth forecasts, so I can't say I'm surprised to see them slump today now they're falling short of them.
But even after today's drop I wouldn't be in a rush to snap up its shares. Until its North American business shows signs of improvement I would keep well clear of the company.
In the meantime investors might be better served with an investment in packaging companies Amcor Limited (ASX: AMC) or Orora Ltd (ASX: ORA) instead. Both companies have strong growth prospects and have defensive qualities like Brambles.
