Despite the disruptions from Covid-19, Avon Rubber‘s (LSE:AVON) share price skyrocketed throughout 2020, thanks to new contracts with the Department of Defence (DoD).
But lately, this incredible growth seems to have reversed. Since December 2020, Avon Rubber’s share price has fallen almost 40%. What’s going on? And is this a buying opportunity for my growth portfolio? Let’s take a look.
A military specialist
If you are not familiar with the business, Avon Rubber is a designer and manufacturer of personal protection equipment. Its products are predominantly used in the military and first response units such as the police and firefighters.
The business has two main units. The first and larger one creates respiratory products such as gas masks, underwater breathing units, and low profile escape hoods. Recently the firm partnered with University College London and adapted its technology to create a new patient breathing interface for ventilators used to treat severe cases of Covid-19.
Its second and relatively newer unit specialises in ballistic protection gear, such as ceramic body armour and helmets.
Combined, these products have enabled the business to become a key supplier of military-grade protective gear for the US armed forces. All the while, cementing numerous long-term contracts that have led to explosive growth for investors.
So why did the Avon Rubber share price fall?
As I just said, a core component of its rising share price is the large contracts with the DoD. So a sudden drop is not at all too surprising when the firm failed to deliver an order on time.
The company was due to supply body armour plates for the US military. However, because of an unpredicted prolonged approval process, Avon has been unable to deliver the promised products. The management currently expects the order won’t be completed until early 2022.
Needless to say, this is not good news. And it has undoubtedly impacted the stock’s reputation for reliability. However, the extent of the reputational damage appears to remain relatively limited. The stock continues to receive large scale orders. Most recently, a $33m contract to provide its respiratory devices for NATO was signed.
There are some investment risks to consider
The world of personal protection equipment is constantly evolving. Numerous competitors are targeting the same contracts which Avon currently holds. Suppose the business is unable to identify new and improved products to protect the safety of its users. In that case, competitors might be able to swoop in a take over existing contracts in the future.
The same risk applies if Avon Rubber once again fails to complete orders on time. While the most recent incident appears to be a one-off event, it may happen again in the future. If delivery dates continue to be missed, the firm’s reliability will likely come into question, resulting in future revenue loss. At least that’s what I think.
Is the Avon Rubber share price a bargain?
Even after this large drop, the Avon Rubber share price is by no means cheap. But that is often the case with high growth stocks. Personally, the valuation is still a bit too rich for my tastes.
However, the business looks incredibly strong to me, so I may be tempted to add it to my growth portfolio if its share price continues to fall.
Zaven Boyrazian does not own shares in Avon Rubber. The Motley Fool UK has recommended Avon Rubber. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.