I enjoy having conversations with my friends about the stock market. The topics range from what the best growth stock is right through to potential cheap shares worth considering. A mate of mine pointed out a stock to me earlier in the week that certainly warrants attention. What is it?
In the headlines for the wrong reasons
I’m talking about WH Smith (LSE:SMWH), and it’s certainly a controversial choice! At its core, the business is split in two. The traditional high street stores sell books and snacks, which many are aware of. The far more important part of the company is the Travel division. It operates in airports, railway stations and hospitals across the UK and internationally where it benefits from captive footfall and high-impulse purchasing.
This is where WH Smith really makes its money, earning revenue through concession agreements with landlords such as airports, selling everything from magazines and sandwiches to electronics and travel essentials at high margins due to premium pricing and high dwell time.
The share price fall
Over the past year, the stock is down 62%. In short, many investors have grown uneasy about a mix of cyclical and structural pressures. The high street business continues to drag on sentiment, with declining footfall and thin margins.
At the same time, trading updates have included profit warnings and gloomy outlooks. Earlier this week, the company cautioned that pre-tax profits for the year would range £75m-£90m, down from previous guidance of £90m-£105m.
It also announced a capital raise of £100m, aimed at strengthening the balance sheet, but sending a clear, worrying signal that it doesn’t have good cash flow right now.
Is the sell-off overdone?
The stock’s at its lowest level since 2012, but the case for it being cheap needs more substance than that. For a start, the company’s still on track to be profitable. It’s not like the business is losing significant money and in threat of going bust immediately. Therefore, if it can remain profitable, there’s a case to be made for the stock having fallen too far relative to the earnings potential.
Further, the Travel division’s still expanding internationally, particularly in North America and Europe, where airport retail spending per passenger remains structurally higher than pre-pandemic levels. The latest update mentioned, “total revenue in North America for the 14 week period increased by 10% compared to the prior year”.
This division’s high-return and increasingly dominates group profits, meaning the business is gradually transforming into a travel-focused operator rather than a traditional retailer. If passenger volumes continue to recover globally, earnings could track higher, as much of the cost base is fixed under long-term concession agreements.
Don’t get me wrong, this is a high-risk stock. Even though I believe it’s cheap, there’s nothing to say it can’t get even cheaper, falling more. For the moment, it’s too risky for me to buy, but investors who see things differently might want to consider it.
Should you invest £5,000 in WH Smith right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if WH Smith made the list?
Jon Smith has no positions in the shares mentioned.
