Petra has been ramping up production after a number of expansion projects, but this process has taken longer than expected. The company now expects this year’s production to be 8%-9% below its previous guidance of 4.4m carats. Revenue is expected to be about $485m, below forecasts of $533m.

Frustratingly, the company has chosen not to provide a revised estimate of earnings, other than to note that these will be below market expectations. Based on what we do know, I’d expect earnings to fall at least 10% below consensus forecasts of $0.12 per share, possibly more.

Despite this, today’s news isn’t necessarily a disaster. The company emphasised that it has now reached an operating rate which supports 2017/18 production guidance of around 5m carats. Assuming conditions remain stable in the diamond market, cash flow and profits could rise steadily over the next year.

Indeed, if forecasts for the year ahead remain unchanged, Petra stock now trades on a 2017/18 forecast P/E of 6.8 with a prospective yield of 2.6%. This might be attractive, except for one big risk factor.

In today’s update, management advised that they have had “initial constructive discussions” with lenders about “the likely shortfall in the upcoming ratio measurement”. This seems to suggest that the company is in danger of breaching its lending covenants when they’re tested at the end of June.

If trading improves next year as expected, this probably won’t be a big issue. But if things don’t improve, shareholders could face dilution in a potential refinancing. For this reason, I won’t be investing.

A turning point?

Butcher and food-to-go chain Crawshaw Group (LSE: CRAW) fell 13% after releasing a trading update on Wednesday. The company said that during the five months since February, sales have risen by 5.1%. However, like-for-like (LFL) sales have fallen by 4.5% during the same period.

The rate at which LFL sales are falling has slowed from 7.3% last year. But today’s figures seem to suggest that Crawshaw is opening new stores while sales are still falling in older shops.

The company put in place turnaround initiatives aimed at improving LFL sales at the end of last year. We’ll get more of an idea of how successful these have been when the group publishes its interim results, which I’d expect in September.

These should also provide more details about Crawshaw’s joint venture with meat and food producer 2 Sisters Food Group, which was announced in April.

2 Sisters founder Ranjit Boparan has invested £5.1m at 15.2p per share for a 29.9% stake in the group. He also has warrants to acquire a further 20.1% of the group at the same price, if the share price reaches 40p.

This deal has resulted in some dilution for Crawshaw shareholders. But management expects the 2 Sisters deal to provide “a greater range and better availability to our customers”. This could be a foundation for improved profit margins and sales growth.

Overall, Crawshaw seems to offer a mix of potential risk and reward. My view is broadly neutral, so I won’t be investing.

The post These growth stocks could be trading below fair value appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

The firm, which sells fresh meat and food-to-go from stores around the UK, said sales in five weeks to January 1 grew 13% year-on-year. The number of customers visiting the company’s stores rose by the same percentage. However, the majority of this growth came from new store openings. Like-for-like sales declined by a disappointing 3.8% although this was an improvement on the 8.1% drop seen in the four weeks to November 27. Like-for-like customer numbers fell 4.2%, once again an improvement on the 9.7% decline seen a year earlier.

It seems Crawshaw’s efforts to stem its customer exodus are having at least some positive impact but gross margins have taken a hit as a result of the higher marketing spend by the group. For the period the gross margin in like-for-like stores slipped to 43.6% from 44.9% in the second half.

But overall, management expects the group to meet City expectations for growth this year. So despite mixed numbers, the group is on track.

Good news after a rocky year 

Today’s relatively positive trading update is good news for Crawshaw’s investors. The company has had a rough year. After warning that pre-tax losses for the 26 weeks ended July 31 would increase to £400,000 from the £100,000 reported in the year-ago period at the end of September, shares in the group lost more than 50% of their value in a single trading day. 

Unfortunately, City analysts don’t expect the group to return to the black any time soon. A pre-tax loss of £1m is expected for the year ending this month, and a loss of £700,000 is pencilled-in for the year after. The last time Crawshaw reported a profit was in 2015 and since then revenue has nearly doubled.

A better bet? 

On the face of it, Crawshaw’s larger peer, Cranswick (LSE: CWK) may look to be a better investment than the struggling small-cap. Indeed, Cranswick’s earnings per share have grown from 73p in 2012 to 105p for the year ending March 31 2016. Over the next two years, the group’s earnings per share are expected to hit 129p. With average annual earnings per share growth rate of around 10% since 2012, it’s easy to see why the market is prepared to pay 20 times forward earnings for shares in Cranswick. As long as management can maintain the growth rate, it’s worth paying a premium multiple for them.

That being said, even though Crawshaw is lossmaking the group is still growing rapidly. Over time, as its store opening programme matures, management’s investments should start to pay off. For the first half of the group’s 2016 financial year, £700,000 was invested in new stores. If you strip out this cost, it would have reported a profit for the period.

Overall then, for the patient long-term investor, Crawshaw might be an attractive investment.

The post Should you buy Crawshaw Group plc over Cranswick plc? appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.