Those remaining loyal could be forgiven for thinking that things couldn’t possibly get any worse. Unfortunately, that’s just what’s happened following today’s publication of a horrific set of full-year figures for 2019.

Let’s take a closer look at what’s caused more investors to throw in the towel. 

“Challenging environment“

As a result of falling natural gas prices, the introduction of the energy price cap by the government, and nuclear power station outages (collectively referred to as a “challenging environment“), the battered firm reported a huge 35% fall in adjusted operating profit to £901m. On a statutory basis, an operating loss of £849m compared to 2018’s profit of £987m was reported. 

As one might expect, outgoing CEO Iain Conn tried to put a positive spin on things, highlighting that the company had managed to stem the outflow of customers to rival suppliers, make costs savings and keep adjusted operating cash flow and net debt within their target ranges. He went on to say that “performance during the second half was much improved compared to the first half”.

To say that the market was left unconvinced is putting it mildly. With shares down 17% today, I’m left wondering if there could be even more pain ahead. 

Value trap

Before this morning, analysts were expecting a near-30% jump in earnings per share in 2020. Given that Centrica has now warned that it expects “very low current wholesale commodity prices” to continue impacting its operations, I suspect they may be reaching for their calculators again.

As such, I’d treat the valuation of just 9 times forecast earnings before the market opened with caution, even after the capitulation of its share price. The fact that, only yesterday, Swiss bank UBS suggested that Centrica was a ‘buy’ with a 110p price target shows the problems inherent in trying to ascribe a value to the company as it stands.

That the business appears to have slowed the rate of customers leaving it for other suppliers does not, of course, change the fact that the firm still faces huge competition going forward. Other, more nimble operators will simply continue to offer enticing rates to consumers who, thanks to the ease of switching, are now far less loyal than they once were.

This being the case, I actually think there’s a fair chance of another cut to the dividend in the future. Analysts have been penciling in a 5.08p per share cash return in FY20. That equates to a yield of 7.3% – well above the level at which investors traditionally begin to question whether such payouts are sustainable. 

Adding to the pain is the recent news that Chair Charles Berry – who was taking the lead in searching for a new leader – will be taking time out to address a medical condition. This is yet another setback for a company that also faces the growing possibility of being ejected from the FTSE 100 (with a subsequent knock to the share price).  

Taking all of the above into account, I remain convinced that investors should continue to avoid this value trap like the plague.

The post Here’s why the Centrica share price plunged another 17% today appeared first on The Twelfth Magpie.

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• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Paul Summers 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.

Reasons to be optimistic

The first reason Fevertree’s shares might be worth buying is simply based on the assumption that the market has overreacted. Despite flagging sales in the UK, growth overseas (including 33% in the US) has been encouraging. You might argue that Fevertree is merely experiencing the predictable pains endured by all successful businesses when their domestic markets mature.

Second, Fevertree has a history of scoring highly on metrics such as operating margins and returns on capital employed — just the sort of business preferred by star fund manager Terry Smith. Importantly, those that built the company from scratch also remain in post with sizeable shareholdings.

Third, Fevetree’s finances are in sound order with management expecting to report a year-end cash position of £128m in March. Many firms would kill for its balance sheet. 

Fourth, Fevertree doesn’t feature high up the list of those stocks currently receiving attention from short-sellers. That suggests even the most pessimistic market participants lack the conviction, at least for now, to truly bet against CEO Tim Warrillow and his team being able to turn things around. 

A final, admittedly speculative, reason is that Fevertree’s dramatic fall from grace makes it a bid target. Potential US suitors include beverage giants Coca Cola and PepsiCo. In the UK, Diageo — owner of gin brands Gordon’s and Tanqueray — could also be running the rule. 

On the other hand… 

The first reason I’d steer clear is the possibility we’ve reached ‘peak gin’ in the UK, at least based on the revenue growth stagnating. Like most things, specific drinks gain and lose popularity over time. Perhaps recent trading is the first indication of a reversion to the mean.

Second, there’s still no certainty the company’s performance in the UK can be replicated overseas where the popularity of a gin and tonic is arguably lower. Moreover, the trend towards premiumisation could slow if concerns over the global economy gather pace, leading consumers to switch to lower-priced alternatives, or avoid them altogether.  

A third reason relates to increased competition and the lack of an economic moat. With the aforementioned excellent margins, it was only a matter of time before more established rivals set out to steal market share back from the AIM-listed upstart. Even if the demand for mixers were to remain, there’s no guarantee fickle shoppers won’t gravitate towards other brands. 

Fourth, the potential opportunity cost of missing out on gains elsewhere must be considered. This is particularly relevant here given that Fevertree returns very little cash to shareholders. As such, investors might reasonably ask whether it’s worth waiting for a recovery if they aren’t being compensated for their patience.  

The final reason to avoid Fevertree rests on its valuation. Despite falling 60% from the highs reached in September 2018, the stock still trades on a lofty 30 times forecast earnings — mightily expensive for a company issuing profit warnings.

In sum, I remain undecided and that’s sufficient for me to stay on the sidelines for now.

The post 5 reasons why I’d buy the Fevertree Drinks share price (and 5 reasons I’d steer clear!) appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Paul Summers 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.

Why? There are two key reasons. First, Capita’s share price reaction is partly driven by the fear that the company could soon follow in the footsteps of Carillion, a scenario that seems very improbable to me. Second, a potential turnaround at the company could deliver serious upside for shareholders, given its current valuation.

Capita isn’t Carillion

I hope it’s not confirmation bias that has driven me to think Capita is not another Carillion, as there are some very noticeable differences between the two companies.

Firstly, Capita’s balance sheet is in much better shape than Carillion’s was a year ago. Although both had big debts and pension deficits running into the hundreds of millions, Capita’s financial liquidity is much more robust, as the company has more than £1bn in cash at the bank. Moreover, it also plans to raise £700m in fresh equity to further strengthen its balance sheet and to starve off a liquidity crunch.

Secondly, Capita is a different kind of outsourcer to Carillion. It isn’t involved in the sort of construction contracts that Carillion tripped up over. Instead, Capita offers services such as collecting the TV license on behalf of the BBC and helping private sector clients manage back office tasks.

Turnaround prospects

Capita has had similar problems to Carillion, such as relying too heavily on acquisitions and bidding too low to win contracts, but it’s in much better shape to deliver a turnaround at the business.

There’s still value in the outsourcer’s contracts, with Capita still set to generate between £270-300m in underlying pre-tax profits in 2018. There’s a plan to simplify the business, by selling non-core assets, and I reckon it has the right person at the helm of the company. CEO Jonathan Lewis is a well-respected turnaround specialist, having previously taken on the job of troubleshooting Amec Foster Wheeler.

Analysts at HSBC suggest a turnaround scenario could over time lead to a doubling in its share price, although it reckons it is too early to factor that into the valuation right now.

A better turnaround play?

Another turnaround play that may be worth a closer look is Petrofac (LSE: PFC), the mid-cap oil services company that’s been embroiled by a corruption investigation by the Serious Fraud Office (SFO).

Shares in Petrofac took a tumble this week as the company warned its shareholders that the SFO was deepening its investigation into alleged bribery, corruption and money laundering. If Petrofac is found to be guilty, it could face the prospect of a multi-million pound fine, which could greatly hurt its balance sheet and its ability to win new contracts.

New orders

So far, though, its higher counterparty risk has done little to hurt Petrofac, as it continues to secure new business at a robust pace. The company secured $5.2bn worth of new orders in 2017, bringing its order backlog to a total of $10.3bn, which reflects an impressive recovery from a year ago.

This demonstrates its strong underlying fundamentals, which is underpinned by its focus on the Middle East, where the relatively low costs of production in the region have shielded the company from the savage cuts to capital spending in the oil & gas industry.

The post Why I’m sticking with Capita plc for now appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Jack Tang has a position in Capita plc. The Motley Fool UK owns shares of Petrofac. 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.

So, what went wrong and was the writing on the wall for all to see?

Annus horribilis

To say that Carillion shareholders had an awful year isn’t completely accurate. Indeed, the first six months of 2017 showed little indication of the carnage that was to follow. Beginning the year at 238p, shares remained above the 200p mark until June. As the FTSE 100 began touching record highs, casual observers may have interpreted the gradual fall as nothing more than investors taking some money off the table in what was rapidly becoming a rather expensive market.

What happened next, however, was nothing less than a cautionary tale on the risks of investing in single companies. On July 7, Carillion’s stock could be purchased for 192p. In six days, this had dropped to 55p — a fall of over 70% — as investors fretted over news of contract writedowns (to the tune of £845m), worsening cashflow, the swift resignation of CEO Richard Howson and the removal of dividend payments. 

Following its inevitable relegation from the FTSE 250 in August, a “disappointing set of results” in September — including the announcement of a further £200m of writedowns — heaped even more pressure on the board. Despite continuing to win contracts (most notably to assist in the construction of the HS2 rail network), the beleaguered company issued its third profit warning in five months in November and stated that it was in danger of breaching its debt covenants. The shares halved in value in a single day.

By mid-December, it confirmed that it had reached an agreement to sell a large proportion of its UK Healthcare Facilities management business to outsourcer Serco as part of its plan to dispose of £300m worth of non-core assets. A total of £47.7m will now be paid by the latter in instalments with the first arrangement expected to be transferred in Q2 of next year. This was swiftly followed by the announcement that the company had moved the start date of new CEO Andrew Davies forward to January 22 from the beginning of April. Quite where Carillion’s share price will be then is anyone’s guess.

Tell-tale sign

Could investors have foreseen this fall from grace? While it’s easy to be wise after the event, the fact that it was by far the most shorted share on the stock exchange should have set alarm bells ringing.

Even in December, Carillion remains truly hated with nearly 17% of its shares being shorted according to shorttracker.co.uk. This suggests that many are betting against the company staging any kind of recovery.  When you compare the amount of debt on its books (now estimated at roughly £1.5bn) to the company’s valuation of just £73m, that feels entirely rational. To be sure, surviving past 2018 will be a momentous achievement based on current circumstances.

With horrific debt, no dividend and a hugely tarnished reputation, Carillion is about as uninvestable as they come and a brutal reminder for investors that taking an early loss — while difficult — can sometimes be the best course of action.

The post 2017 in review: Carillion plc appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Paul Summers 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.

But this peaceful routine is just the calm before the storm. Just a few clicks away it lurks, ready to pounce. When it hits you – and hit you it will – you freeze as your retirement drifts further into the future. 

I’m talking, of course, about profit warning paralysis. I’m being more than a little dramatic too, but I’m sure every investor out there has felt uncertain in the face of bad news. Deciding whether or not to sell, or perhaps even buy, more shares can feel like an insurmountable task. 

If you find yourself panicking after a profit warning, fear not. We’ve designed a pragmatic methodology to help you separate the irrelevant from the irreversible. The next time you find your critical faculties overwhelmed by sudden negative news (and it happens to the best of us) simply work through this three-step survival guide. 

1. Is the investment thesis still intact? 

Every time I make an investment, I create an investment thesis – a small paragraph that explains exactly why I’m buying the share. For example:

“I bought company x because I believe its superior product can prosper overseas.” 

If you’re investing for the long term, having a thesis for each stock you buy is incredibly important, because it helps you focus on what is important. If the reasons behind the profit warning scupper your investment thesis, it is probably time to move on and sell the shares. 

If you haven’t already, perhaps you should clarify the investment thesis behind each of your investments.

2. Quantify a worst-case scenario

If step one didn’t help, I’d advise you try to quantify the profit warning. If the announcement uses vague terminology such as “significantly behind expectations” you should try to put a number on what a worst-case scenario might look like. 

For example, a company I follow recently warned on profits because one of its major clients had declared bankruptcy. After sifting through the annual report, it seemed clear that no single client accounted for more than 10% of revenues, so that became my worst-case scenario. As a result, I’m considering buying up some of the shares. 

Putting a number on the downside will remove that fear of the unknown and help you make a considered decision.

3. Go for a walk. 

If step one and two haven’t banished the nerves, I’d recommend getting away from the computer screen. Go outside, play some sport or read a book. Just get your mind away from the news for a while. Perhaps sleep on it. Decisions made in a panic are almost always poor, so ensure you regain control of your critical faculties before doing anything at all. 

The post Smash profit warning paralysis with this three-step guide appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?