The stock looked expensive to me back then — but I wasn’t expecting Monday’s sales warning, which wiped around 25% off the group’s share price. A mix of supply issues and lower order levels than expected mean that revenue will rise by just 1%-2% this year, against previous guidance of 4%.

As the dust starts to settle, the shares have steadied at about 212p. But despite this modest rebound, ConvaTec stock is now cheaper than at any time since its flotation in late 2016. The shares now trade on a 2017 forecast P/E of about 15, falling to a P/E of 13 for 2018.

A buying opportunity?

I believe it’s probably too soon to buy.

Management is still “reviewing the financial implications for growth and margins” in 2018. Chief executive Paul Moraviec has promised “further guidance” early next year, but the phrasing of his comments suggests to me that bad news is likely.

It’s also worth noting that ConvaTec is yet another example of an IPO that’s disappointed the market during its first year of public trading. In my view, it pays to be suspicious about recent flotations at the moment. Are the outgoing owners simply looking to cash in ahead of tougher times?

In ConvaTec’s case, I’ll be looking for clear evidence of stable profits and further debt reduction before considering an investment. For now, I’m going to stay away.

A smoother ride?

Troubled modelling and collectibles group Hornby (LSE: HRN) issued another profit warning this morning. The news follows the appointment of new chief executive Lyndon Davies. Mr Davies is the chairman and controlling shareholder of the Oxford Diecast model and collectible business.

Following his initial review of the business, Mr Davies has decided that to protect the value of the group’s brands, it will no longer offer discounted stock to volume buyers. Although the company had already warned shareholders that full-year results were likely to be below expectations, today’s statement confirms that there will be “a material impact on profitability” this year as a result of lower sales.

Time to buy?

At 32p, Hornby’s shares currently trade nearly 10% below their book value of 35p per share. I admit that the long heritage of brands such as Hornby, Airfix and Scalextric is a potential attraction. But I think investors need to ask if the stock is really cheap enough to be a compelling buy.

The last time this group reported a profit was in 2012, when it generated an operating margin of 7.4%. If this had been applied to last year’s sales of £47m, I estimate that the company might have reported earnings of about 3p per share, assuming a 25% tax rate.

That would give a P/E of 10.6 at the current share price of 32p, which seems fair. My concern is that Hornby is only expected to report earnings of 1.3p per share in 2018/19, giving a forecast P/E of 26.

In my view, a reasonable recovery is already priced into the stock. I’m not sure the shares are cheap enough to be a great turnaround buy.

The post Why I’m not piling into this FTSE 100 turnaround stock just yet appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the 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.

Broken model

Former chief executive Richard Ames resigned in February 2016 following the third profit warning in five months while chairman Roger Canham resigned today with immediate effect after Phoenix Asset Management Partners, of whom he is a director, launched a mandatory 32.375p a share offer for the shares in the model train set maker it doesn’t already own, valuing it at £27.4m. Hornby has been concentrating on streamlining costs and stabilising its existing brands, and although it scrapped its dividend again today it claims to have now completed the first stage of its turnaround plan.

Picking up steam

The headline numbers don’t look great, with revenue falling from £55.8m in 2016 to £47.4m, while the underlying loss before tax widened from £5.7m to £6.3m. However, the direction of travel looks more positive, with the reported loss before tax falling from £13.5m to £9.5m. Hornby incurred exceptional items of £3.3m, but that was down from £7.9m in 2016.

On 31 March, net cash stood at £1.5m, a big improvement on last year’s £7.2m. Hornby has been streamlining its operating model, reducing costs, supporting key UK brands, improving cash generation and focusing on profitable products to build margins, which now stand at 40%. City analysts say management can turn this year’s underlying loss into a pre-tax profit of £500,000 in the year to 31 March 2018. However, revenue growth looks minimal, and right now Hornby looks like a slow train coming.

Minds games

Intellectual property firm Allied Minds (LSE: ALM) has also been through a tough time, its share price down 51% over the past year, and 75% over two years. Its shares fell off a cliff in April after it announced a $146m writedown on the value of seven of its subsidiaries, which it is now looking to sell, transfer or liquidate.

There is nothing wrong with closing down struggling subsidiaries to focus on the successes but investors felt aggrieved having being asked to pump in £64m in fresh equity just three months earlier. Top fund manager Neil Woodford, who owns 30% of the university and government technology commercialisation specialist, forked out £15m and is publicly standing by his controversial pick, but others are rightly more wary.

Scary stuff

You don’t need me to tell you that private equity is a risky business and you might agree with chief executive Jill Smith’s view that these “necessary” measures place Allied Minds in a stronger position to deliver returns to shareholders through accelerated commercialisation, monetisation and portfolio growth. 

This could be a brave recovery play. Woodford certainly hopes so, but Allied Minds looks far too risky for me. It looks on course to deliver its fifth consecutive year of pre-tax losses at around £92m in the calendar year 2017, with a forecast rise to £96.71m in 2018. Obviously, the company is focused on investing in assets right now, the problem is that delivery has been non-existent. Neil Woodford is a far braver man than I am.

The post 2 turnaround stocks you might consider buying right now appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Harvey Jones 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.

Hornby notified its shareholders today that the group expects to meet its full-year forecasts as its multi-year restructuring programme remains on track. However, while the company is confident that it will meet full-year City expectations, management is also warning that the group will continue to be lossmaking while it progresses through its “transition.” 

And the City forecasts it expects to meet are hardly anything to get excited about. Analysts have pencilled-in a pre-tax loss of £6.3m for the year ending 31 March and earnings per share of minus 5.9p. Hornby’s management expects revenue to decline by 20%-25% year-on-year. According to today’s trading update, group revenue was down 25% over the Christmas period, with UK revenue falling 21% due to the move by the group to slim its product range and exit concession arrangements in the UK.

Still, despite falling revenues, I believe Hornby’s turnaround has now taken hold, and over the next 12 months, the company will be able to prove to its investors that it’s back on track. 

A different business

Hornby will never be the toy giant it once was. The world has changed considerably since it dominated the toy scene and it’s highly unlikely toy tastes will change back to the way they were any time soon. Nonetheless, there’s still demand for Hornby’s products, albeit from a smaller base. 

Over the past few years, Hornby has been struggling to adapt to the new trading environment, but it now looks as if the company has found its feet. By lowering its cost base and focusing on a smaller audience, Hornby might be able to replicate the same success as Games Workshop, which is focused on its die-hard hobby fans who are willing to pay more for less.  As a result, Games Workshop is a cash cow. The shares yield 6.2% and have gained 60% in the past 12 months. 

A different model 

Hornby’s peer, Character (LSE: CCT) has been able to succeed where Hornby has failed thanks to innovation. New toy lines have helped the group expand revenue 20% over the past year and City analysts are expecting the company to report pre-tax profit growth of 25% over the next two years. But it doesn’t look as if the market is convinced Character can keep this growth up. Shares in the company currently trade at an undemanding forward P/E of 10.6 and yield 3.2%. 

As Hornby’s toys are relatively niche compared to Character’s multiple toy lines, it’s not likely the company will ever be able to replicate Character’s success. However, if the firm concentrates on its most important, and profitable customers, I believe it can return to profitability and generate lucrative returns for investors.  

The post Why I’m bullish on this turnaround stock appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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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.

Lakehouse

Shares in asset and energy support services company Lakehouse (LSE: LAKE) have fallen by around 7% today after it released a somewhat mixed trading update. Its Regeneration division continues to create challenges for the business, with Lakehouse now anticipating that there will be further writedowns during the current financial year as it seeks to close out issues with contract settlements. This is expected to have an adverse impact of £4m on its full-year results.

However, Lakehouse is also experiencing strong underling trading elsewhere in its business and today announced a £37m contract win from Scottish Power to install domestic smart meters across Scotland, Wales and North West England. And with Lakehouse expected to return to double-digit bottom-line growth next year, its shares trade on a price-to-earnings growth (PEG) ratio of just 0.4. This indicates that while investor sentiment may be weak at the moment, there’s good value on offer for long-term investors.

Hornby

Despite releasing no significant news today, shares in Hornby (LSE: HRN) have risen by 7%. However, they’re still down by 67% year-to-date as the financial strength of the hobby products producer has been called into question by some investors. However, with Hornby having undertaken a successful placing to raise £8m in recent weeks, its balance sheet is now much stronger than it was previously and this lowers its risk profile considerably.

Furthermore, the placing should allow Hornby to execute its new business strategy. This includes a major cost reduction plan as well as a more focused product range. While Hornby intends to keep its main brands, it will also streamline its European operating model and seek to exit unprofitable concessions. Although this strategy seems sound and could work, Hornby continues to offer a very uncertain outlook and therefore it may be prudent to await evidence of a successful turnaround before buying it.

Proton Power Systems

Rising by 86% today is Clean Tech total power solution provider Proton Power Systems (LSE: PPS). It has today announced a major restructuring due to it seeing major growth ahead in the Clean Tech market, with its business set to be split into three segments. These are Stationary business, Mobile business and Maritime business, with Proton expecting to deliver year-on-year revenue streams as the commercialisation of its core technology is now realised.

Furthermore, Proton is on track to increase its sales by 250% this year and due to it seeing proof that the fuel cell technology it offers is commercially attractive to customers, Proton’s long-term outlook is now much more positive. Certainly, it remains a relatively high-risk play, but with clean energy becoming more in-demand and Proton now having a clear structure through which to take advantage of this, now could be a good time for less risk-averse investors to buy it.

The post Should you buy 3 of today’s major movers? appeared first on The Twelfth Magpie.

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Peter Stephens 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.

No worse than expected

The model toy and train company announced its annual results this morning, alongside details of an rescue share placing. Hornby will raise £8m at 27p per share. That’s an impressively small 15% discount to Tuesday’s closing price of 32p.

However, Hornby warned the market this morning that the company’s future may be in doubt if shareholders don’t approve the placing. A new £10m lending facility that’s needed to refinance Hornby’s net debt of £7.2m won’t be approved if the placing doesn’t go ahead.

Last year’s results were no worse than expected. Revenue fell by 4% to £55.8m and the firm made an underlying pre-tax loss of £5.7m. Hornby suffered badly with IT and supply chain problems last year, which the firm says contributed to poor sales.

Under the guidance of new chief executive Steve Cooke, Hornby now plans to cut its product range by 40% and focus on core brands and markets. The firm also plans to make significant cost savings and deal with a sizeable overhang of unsold stock from last year.

In my view, big gains are possible — but significant risks remain.

Lower costs for key oil project

Shares in North Sea oil and gas producer Ithaca Energy (LSE: IAE) edged higher on Wednesday, after the firm said that operating costs for its flagship Greater Stella Area (GSA) project would be lower than expected.

The expected savings are the result of Ithaca being given an opportunity to use a pipeline connection that’s been relinquished by another operator. First production from the Stella field is expected in late September 2016. Exporting oil by pipeline rather than tanker will save cash when the pipeline connection is completed in 2017.

Ithaca shares have risen by 132% so far this year and are no longer an obvious bargain. In particular, I’m concerned about the firm’s $630m net debt. However, Ithaca has some hedging in place through to mid-2017.

The firm also expects operating costs to fall to $20/boe when Stella production starts. This should allow the firm to start repaying its debt by the end of this year. In my opinion, Ithaca could deliver further gains for shareholders.

Woodford is backing this stock

Unlike Hornby and Ithaca, Game Digital (LSE: GMD) is already profitable. However, this hasn’t stopped the group’s share price from falling by 70% over the last year. A profit warning just before Christmas did most of the damage, but Game Digital isn’t a basket case.

Game is now expected to report earnings of 9.7p per share for the year ending 25 July. This puts the stock on a forecast P/E of 8.2, with a prospective dividend yield of 6.4%.

The firm’s big strength is that it has plenty of cash. Net cash was reported as being £120m at the start of January. Although this probably represents a seasonal high, the group’s ability to generate free cash flow is significant. Results for the first half of this year suggest that the dividend should be comfortably covered by free cash flow.

Neil Woodford’s funds own a slice of Game Digital, and I can see why. If trading stabilises, this company has the potential to generate a generous stream of cash for shareholders.

The post Could Hornby plc, Ithaca Energy Inc. & Game Digital plc double in the next 6 months? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head 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.

This is partly due to a disappointing performance over the New Year period that’s expected to contribute a deterioration in trading profit of between £2.5m and £3m. As a result, there’s a risk that Hornby will breach a covenant of its banking facility as early as March, which is clearly worrying news for the company’s investors.

Although today’s news has been warmly received by the market and Hornby is making progress with its restructuring plans, it appears to be a stock to watch rather than buy at the present time. There could be further challenges ahead in terms of its financial performance since there’s no guarantee that trading will pick up moving forward. And with a new CEO to be found, as well as the company’s unstable financial footing, there appear to be better options elsewhere.

Bright futures

While Vodafone (LSE: VOD) hasn’t released a profit warning, its financial performance has been hurt in recent years due to its exposure to Europe. And with Vodafone being more exposed to Europe than ever following the sale of its stake in North America-focused Verizon Wireless, as well as multiple European acquisitions, the slow growth of the eurozone has put its bottom line under a degree of pressure.

However, this is due to change since Vodafone is expected to increase its earnings by 19% in the next financial year. And with Vodafone expanding its product range through broadband services as well as investing in infrastructure, its long-term future appears to be rather bright. Add to this a yield of 5.5% and interest rates due to stay low over the coming years, and Vodafone could prove to be a strong source of total returns.

Meanwhile Unilever’s (LSE: ULVR) share price has also been held back by its geographic exposure. With it having a bias towards emerging markets and being focused on China for its long-term growth prospects, its shares have risen by just 3% since the turn of the year. That may sound like a strong performance relative to the FTSE 100 (which is down by 6% in the same period) but when you consider that Unilever trades at a discount to many of its global consumer peers, its future share price performance could be much better.

For example, Unilever has a price-to-earnings (P/E) ratio of 21.7 and with a peer such as Reckitt Benckiser having a P/E ratio of 24.6, there’s upward rerating potential on offer. Add to this Unilever’s excellent cash flow and sound balance sheet and it appears to offer a highly favourable risk/reward ratio for the long term.

Certainly, Chinese growth may disappoint in the short run and hold its shares back, but in the long run the growth of China’s middle-income earners is likely to boost Unilever’s sales and profitability.

The post Is Now The Perfect Time To Buy Hornby Plc, Unilever plc & Vodafone Group plc? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Unilever and Vodafone. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

In this article I’ll explain what’s gone wrong — and ask whether today’s falls provide a buying opportunity for investors.

Hornby

Shares in Hornby fell by as much as 46% this morning, after the firm warned investors to expect a pre-tax loss of £5.5m to £6m for the financial year ending in March. That’s three times greater than the £2m pre-tax loss the firm forecast in November.

Hornby says that the problems are the result of disappointing sales and disruption caused by the restructuring of the firm’s supply chain. Together, these have had “a significant impact on the trading performance of the business”.

This explanation might be acceptable, were it not for a more serious problem.

Hornby said this morning that there’s a risk the group will breach one of its lending covenants in March. The group is in discussions with the lender to try and resolve this, but it could result in even bigger losses for equity investors if fresh cash is required.

Although Hornby raised £15m in a placing at 95p per share last June, this obviously wasn’t enough. Investors who took part in the last placing are now sitting on a 50% loss. I suspect they will be reluctant to back a second fundraising unless the new shares are issued at a massive discount to the current share price.

For shareholders who are unable or unwilling to take part, this could result in significant further losses and dilution.

Hornby’s management forecasts have proved to be highly inaccurate and now lack credibility. Until the firm’s finances have been stabilised, I would steer clear. Further falls are possible, so I wouldn’t rule out selling after today’s news.

Renold

UK engineering firm Renold has two divisions, Chain and Torque Transmission. Products include gearboxes and chains used to drive conveyor belts, which are used in a number of industries.

The group issued a profit warning today, telling investors that weak sales had continued into the second half of the year. Underlying sales are now expected to be 10% lower than last year, while adjusted operating profit is expected to fall by £2m. Based on last year’s results, this implies a figure of about £13m.

Unfortunately, Renold didn’t specify the likely impact of exceptional costs or currency effects, making it hard to predict how earnings per share are likely to pan out for the year ending 31 March.

Another concern is that net debt is expected to rise this year, although the firm says it will remain within its covenants. I estimate a year-end net debt figure of at least £25m is likely, which looks quite substantial relative to last year’s post-tax profit of £5.5m.

A final concern is that Renold has a significant pension deficit. Steps have been taken to reduce this over the last couple of years, but I expect a deficit of at least £50m to remain at the end of the year.

Renold has an uncertain outlook and a very average balance sheet. In my view, this stock isn’t an obvious recovery buy at the moment. I’d wait until we have more visibility on earnings and debt levels before making a decision.

The post Why Are Shares in Renold plc And Hornby Plc Collapsing Today? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head 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.