The G8 Education Ltd (ASX: GEM) share price crashed today after the childcare operator issued a full year result that dashed hopes for a quick recovery.
The G8 share price tumbled 13% to $3.16 during lunch time trade – making it the worst performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
The weight of expectation was too much for the company and it wasn't so much the fact that underlying earnings before interest and tax (EBIT) suffered a 12.7% deterioration to $136.3 million but that utilisation rates are still depressed.
In the naughty corner
The occupancy at its childcare centres for 2018 (its financial year is the same as the calendar year) dipped 1.9 percentage points to 74% on a like-for-like basis, and while occupancy rates have improved in the second half of 2018 to be above the same period in the previous year, the recovery appears to be modest.
Perhaps more damaging to the share price was the cautious outlook from management as it stressed that "prevailing conditions remain challenging" even though there is s moderation in the supply of childcare places.
The oversupply of childcare places has been a big reason why the G8 Education share price had been under a dark cloud for most of 2018. But the stock made a big comeback since November 2018 and is still trading on gains of over 50% despite today's sell-off.
Stock getting de-rated
The turnaround in sentiment was driven by the belief that the supply-demand imbalance is rapidly shifting back in favour of G8. This confidence now looks misplaced as monthly like-for-like occupancy is trending down since November even though management is right that the rate is still better than 2017.
It could take a while for supporters to return too after such a bruising blow. I have to wonder why management didn't do more to temper runaway expectations leading up to the results.
Better managing market expectations may not have improved the overall share price performance, but it will ensure investors come back to the stock more quickly.
G8 declared a final dividend of 8 cents a share and posted a 7.7% increase in full year revenue to $858.2 million with the biggest cost increase coming from wage pressure.
Foolish takeaway
The stock looks like a "sell" to me as there is still too much uncertainty over the timing of the anticipated recovery.
What's more, G8 shares are trading on a 2019 consensus price-earnings multiple of over 15 times even after today's big sell-off.
That looks too rich for a company with poor earnings growth visibility. Investors are better off looking elsewhere.
