Today's Falling Knife: Cape Slumps 37%


LONDON -- Cape (ISE: CIU.L) slumped 37% to 184 pence this morning to become the session's heaviest casualty in early trade.

The engineering services contractor admitted the trading performance of its Far East/Pacific Rim division had "deteriorated sharply" during the second quarter, with margins at the operation expected to reduce to approximately half of those seen during 2011.

Cape said it was more exposed to the "construction support services cycle" in the Far East/Pacific Rim area than in other, more mature regions in which the firm enjoyed leading market positions.

Cape also claimed the deterioration at the Far East/Pacific Rim operation would have a significant effect on the group's overall performance in the near term. Cape added that the challenging conditions in the Far East/Pacific Rim would persist into 2013.

Today's statement reinforced the old adage that "profit warnings come in threes." In May, Cape's shares plunged 27% after the firm warned of problems with a contract in Algeria that would cost the mid cap 14 million pounds. And in November of last year, a cagey statement that referred to "ongoing margin pressures in the Middle East and the risk of project scheduling delays during 2012" wiped 29% from the share price.

Cape's shares are down a thumping 69% since their 2011 peak. In today's knife-edge market, smaller companies can be punished severely if they hit trouble.

But Cape does have a history of collapses and strong recoveries. During 2008, for instance, the shares plunged from more than 300 pence to as low as 18 pence -- but have since generated a tenfold return, despite the aforementioned profit warnings. Then, between 2000 and 2002, the shares crashed 90% to as low as 6 pence but went on to expand 50-fold within five years.

Such life-changing returns suggest it may pay to keep an eye on Cape for another recovery.

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