Long a Crikey favourite, Eddie Groves’ ABC Learning Centres has had a torrid time of late, with its shares closing at $5.51 yesterday (although they have recovered in early morning trade today) – down from $8.50 in January.

The last time ABC shares were at these levels was back in mid-2005. ABC has not announced any official profit downgrades, but the market appears to be factoring in a drop due to the strength of the Australian dollar and ABC’s burgeoning US asset base.

According to ABC’s 2007 Annual Report, the company has 1,015 centres in the United States (out of a total of 2,238 centres worldwide). While the bulk of ABC’s earnings are still generated in Australia, in 2007, its US centres generated $40.2 million profit (just over 20 percent of ABC’s total profit before tax). However, while its US-business represents a relatively small portion of ABC’s income, the US business is expected to be a key driver of ABC’s future growth.

Groves has previously noted that ABC does not hedge its US dollar exposure, but that the company has a partial hedge by virtue of US dollar denominated debt.

As Crikey’s Stephen Mayne has previously noted, the Singapore Government wouldn’t be overly impressed with the performance of ABC in recent times. Temasek, Singapore’s investment company, spent $401.5 million acquiring 12 percent of ABC back in May for $7.30 per share. Their investment has lost around 20 per cent in six months. Also unhappy with his company’s performance would be Groves himself, who dipped into his own pocket in July this year to acquire an additional 500,000 shares at an average price of $6.81 per share.

Aside from US dollar worries, analysts have previously been critical of ABC for chasing revenue growth at the expense of earnings per share. Last December, Crikey noted that:

An interesting point to note about ABC is that while its revenue growth has been phenomenal, its NPAT increase has lagged. In 2002, ABC earned $6.8 million on revenues of only $23.8 million (with an end of year share price of $2.64). Last year, ABC earned $81.1 million on revenues of more than $631 million.

Therefore, back in 2002, ABC earned 28 cents for ever $1 of revenue, whereas last year it earned only 12.8 cents for every $1 of revenue. Rather than becoming more profitable (due to synergies and economies of scale), ABC seems to becoming less profitable the bigger it gets.

That point continues to be proved. For FY2007, ABC earned $143 million on $1.65 million revenue – down to 8 cents profit for every dollar of revenue earned.

Groves has proved his doubters wrong in the past, but ABC’s decision not to hedge its US investment could come back to bite as the US/AUD approaches parity and the company is unable to maintain profitability levels as it opens new centres.