Do today’s big fallers offer buying opportunities, or should savvy investors steer clear of these troubled stocks?
Bovis Homes Group
Shares in housebuilder Bovis Homes Group (LSE: BVS) fell by 10% this morning after the group warned that a shortage of skilled labour and planning delays were putting pressure on profit margins.
Bovis shares have now fallen by 21% over the last three months, making the firm the worst performer of all the big housebuilders.
According to today’s statement, demand remains strong. Bovis’s average selling price is expected to rise by 7% this year. The problem is that new high profit margin developments, which the firm expected to start selling this year, will now be pushed back into next year.
Bovis reported an operating margin of 17% last year, and now expects this year’s result to be “marginally higher”.
The firm didn’t issue a formal profit warning today, but I suspect analysts’ earnings forecasts may now be trimmed. On this basis, the shares currently trade at 9-10 times 2015 forecast earnings. I think that’s enough, at this point in the housing cycle.
Poundland
One of today’s biggest fallers was Poundland Group (LSE: PLND), whose shares are down by 20% to 224p at the time of writing.
The group said that underlying pre-tax profits fell by 26% to $9.3m during the first half, despite sales rising by 6% to £561m. Poundland blamed “an exceptional period last year” for some of the falls, suggesting that this year’s profits are more typical than those the company reported last year.
However, the main focus for investors over the next year will be the performance of the 99p Stores acquisition, which will increase the number of Poundland stores by 40%. Poundland’s chief executive Jim McCarthy says the firm is confident that the 99p Stores can add at least £25m of additional earnings before interest, tax, depreciation and amortisation (EBITDA) to the business.
Investors will want to see how much of this is turned into real profit. Poundland admitted today that the third quarter has seen volatile trading and results will be heavily dependent on sales in the six weeks before Christmas.
After today’s falls, Poundland shares are trading on a 2015/16 forecast P/E of about 16. Given the uncertain outlook, I think there is better value elsewhere.
Johnston Press
A forecast P/E of just 2 was not enough to stop the shares of local newspaper publisher Johnston Press (LSE: JPR) falling by 11% this morning. The slide came after the group said that underlying revenue fell by 8.8% during the third quarter.
Circulation revenues from printed papers fell by 7.2% during the third quarter, while print advertising revenues were down by 14.7%. Replacing this lost revenue with digital revenue is proving difficult. During the third quarter, the number of unique users visiting the firm’s websites rose by 22%, but underlying digital revenue only rose by 8.4%.
At the half-year point, Johnston had net debt of £183m and an £87m pension deficit. Collectively these are 4.6 times greater than the firm’s market capitalisation.
Johnston has survived this far by continually cutting costs, but ultimately needs to make some money. The market currently values these shares on a forecast P/E of just 2. This is a warning that the firm’s debt may yet cause the business to fail.