Ever since the company’s IPO in September last year, shares in Funding Circle (LSE: FCH) have been on a downward trajectory. After listing at around 440p per share, the stock is currently trading under 100p, a decline of nearly 80% in less than a year.
Unfortunately, it doesn’t look as if the company’s performance is going to improve any time soon. According to its half-year report, Funding Circle’s business performance actually deteriorated during the first six months of 2019, even though revenue expanded 29%.
Rising losses
According to the report, group revenue increased by 29% to £81.4m during the first half of 2019, but increased costs pushed adjusted earnings before interest tax depreciation and amortisation down to -£19.7m, from -£13.9m in the same period a year ago.
The adjusted EBITDA margin declined from -22% to -24%. The loss before tax for the period hit £30.8m, up from £27.1m last year.
Still, despite this performance, the company continues to believe that its adjusted EBITDA loss margin for 2019 will be better than in 2018. I’m doubtful Funding Circle can achieve this performance, especially with Brexit looming at the end of October. City analysts are also sceptical. They’re expecting a full-year loss of £51m, up from last year’s loss of £49m.
And even though the City is expecting revenue to grow around 45% by 2020, losses will hit £54m by 2020, analysts believe.
With losses set to grow over the next two years, I would sell Funding Circle today, as it doesn’t look as if the company’s share price performance is going to improve anytime soon.
On the other hand, I am much more positive on the outlook for Cineworld (LSE: CINE).
Debt paydown
Cineworld’s acquisition of its larger US peer Regal in 2018 lumped the group with a tremendous amount of debt, which seemed unsustainable at the time.
However, the company has surpassed all expectations since the deal. It is on track to achieve merger synergies of $150m and, according to Cineworld’s results for the first half of 2019, the business’s debt reduction is ahead of schedule.
Cineworld took on $4bn of debt to buy Regal, but by the end of June, borrowings had fallen to $3.3bn (excluding lease liabilities), primarily thanks to a massive sale and leaseback transaction.
Dividend champion
Declining debt is just one of the reasons why I think Cineworld could be a great addition to your portfolio. It is also a dividend champion. At the time of writing, the stock supports a dividend yield of 5%, but with earnings per share set to increase by 17% this year, analysts believe the company has scope to increase the payout by 30% to $0.19. If this comes to fruition, it will leave the stock yielding 6.5%.
At the time of writing, the price for this level of income is just 9.4 times forward earnings, which looks to me to be a steal considering Cineworld’s projected earnings growth.
So, if you’re looking for a cheap income play with tremendous growth potential, then I highly recommend taking a closer look at Cineworld today.