Often, the growth potential of a stock turns out to have been over-egged, or a case of the emperor’s new clothes, and investors end up with a substantial loss. In these situations, three things we commonly see flaws in are the business, the transparency of its financial reporting, and its market valuation.

With this in mind, three stocks I’m currently avoiding are Purplebricks (LSE: PURP), First Derivatives (LSE: FDP) and Telit Communications (LSE: TCM).

Purplebricks

Business: I’ve serious doubts about the long-term viability of online estate agent Purplebricks, due to diminishing revenue returns from increasing marketing spend. In its latest financial year, it eased back modestly on UK marketing in the second half, and saw second-half revenue plunge by £6.5m. It also swung to an operating loss.

Reporting: Purplebricks refuses to disclose the number of its instructions that result in a completed sale. I’ve seen an increase in dissatisfied customers on Trustpilot recently. ‘Bad’ ratings in the last 475 reviews are running at three times the historical rate. I suspect this is a further indication the business is going backwards.

Valuation: At a share price of 110p, Purplebricks is valued at £337m. This is 2.8 times my estimate of trailing revenue of £119m from continuing operations. The rating is far too high, in my view.

First Derivatives

Business: New technology is a sector to which investors seeking millionaire-maker stocks are naturally drawn. Companies in the sector can readily fashion impressive-sounding growth stories. A few buzzwords, a collaboration with a tech giant, and talk of multi-billion-dollar addressable markets can do wonders for investor excitement. Fintech and martech specialist First Derivatives is a case in point.

Reporting: The company’s accounts came in for severe criticism last year from renegade City analyst Matt Earl’s ShadowFall outfit. While First Derivatives has been valued as a high-performing software company, ShadowFall reckoned that on a true view of the accounts, it has the characteristics of a low-margin consultancy or recruitment business.

Valuation: When paper profits are questionable, my default valuation measure is free cash flow. First Derivatives generated around £6m last year. Against this, its market valuation of £574m at a share price of 2,150p is far too rich in my book.

Telit Communications

Business: Another new technology stock is “global enabler of the Internet of Things” Telit Communications. It sold its automotive solutions division earlier this year, reduced its debt, and reported a net cash position at the half-year end.

Reporting: Back in 2017, I showed how Telit’s accounting enabled it to post impressive paper profits, while generating little or no free cash flow. A few months later, founder and chief executive Oozi Cats and his wife Ruth (apparently on the payroll as an ‘art curator’) were exposed as fugitives from historical fraud indictments, and high-tailed it out of Dodge.

Valuation: Cats remains at large and a major shareholder (dealing in the stock as recently as last month). But with new faces in the boardroom, how should we value the remnants of his empire? At a share price of 155p, the market says £206m. I say, show me the free cash flow to justify it.

The post 3 stocks I’d avoid at all costs appeared first on The Twelfth Magpie.

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G A Chester 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.

Such asset sales and cash receipts can prove to be great news for a company and its shareholders, though this is very much dependent on the circumstances of the disposal and the use of the proceeds. Here, I’ll give my assessment of the deals Whitbread and Telit have done, and my view on the two companies’ prospects.

Focus

Coca-Cola’s £3.9bn offer for Costa was widely considered a generous price. The sale served to hasten and simplify what I already felt would be a value-unlocking separation of Whitbread’s coffee and hotel chains.

Management can now focus on growing the Premier Inn business. Its target is to extend the current UK network of 74,000 rooms to over 110,000 rooms. If that’s not exciting enough, it’s planning on replicating the scale and success of the UK business in Germany.

Long growth runway

I found Whitbread’s research and rationale for expanding in Germany — as set out at a Capital Markets Day in February — compelling. Limited design changes are required to localise the Premier Inn product for the domestic German traveller, and management sees long-term potential for a network of over 170,000 rooms in the country.

In view of the long growth runway, and Premier’s history of performing well in a recession, I believe a rating of 20 times 12-month forecast earnings represents excellent value for long-term investors. As such, I rate the stock a ‘buy’.

Baggage

Telit Communications, which describes itself as “a global leader in Internet of Things enablement,” is a company with a lot of unsavoury baggage. It recently settled one legacy claim against it for near to $1m, but remains embroiled in historical tax disputes in Israel and Italy. It’s also under investigation by the UK’s Financial Conduct Authority over the accuracy of certain stock market announcements made in 2017.

However, with the board of directors having changed entirely since the events in question, and the company having just netted $105m cash from the aforementioned disposal, is now the time to reconsider my previously bearish position on the stock?

Concrete numbers

In today’s results for the year ended 31 December, Telit reported a 14% increase in revenue to $427.5m, a 66% rise in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $30.1m, and a statutory pre-tax loss that narrowed to $39.8m from the prior year’s $56.8m.

Disappointingly, the company provided no pro forma version of the results without the now-disposed-of automotive solutions division. We know that in 2017 this division was the relative jewel in Telit’s crown, responsible for $63.2m (17%) of group revenue, but $10.1m (well over half, excluding allocated overhead costs) of group EBITDA. Unfortunately, the company hasn’t given us these numbers for 2018, and so we have no real idea how the rest of the business (the continuing operations) performed on a standalone basis.

Management said it now has the resources to accelerate its strategy for profitable growth, and sounded confident about the future. However, until we’ve had some concrete numbers on the performance of the retained business, I’m still inclined to view this as a stock to avoid.

The post Why I’d buy this cash-rich FTSE 100 stock today appeared first on The Twelfth Magpie.

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G A Chester 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.

Wise to ditch Sage?

Accounting software giant Sage (LSE: SGE) completed its transition to a subscription-based model last year. And having also launched a comprehensive suite of cloud solutions, it said it was looking forward to accelerating momentum in 2018, and beyond. However in April, it downgraded its organic revenue growth guidance for fiscal 2018 to “around 7%” from a previous “around 8%.”

There have been three items of news over the last month that I view as important:

2 August. A Q3 trading update, showing an acceleration of organic revenue growth to 6.8%, from 6.3% in Q1 and Q2. However, a far more demanding step-up to over 8% in Q4 is required to meet the full-year guidance.

20 August. A research note from Deutsche Bank, with some quite compelling evidence that competitors are gaining share from Sage on lower pricing and superior functionality.

31 August. Directorate change: “The Board and Stephen Kelly, chief executive officer, have come to an agreement and Stephen has stepped down as a director and CEO.”

These things individually would be somewhat of a concern, but the combination of all three has me seriously reconsidering the investment case. In the near-term, I see a risk of a profit warning, because meeting full-year guidance is dependent on “closing a number of Enterprise Management opportunities in September.” More importantly, I believe the company’s longer-term targets of annual 10% organic revenue growth, and organic operating margins of at least 27%, will very likely have to be lowered.

In my view, a current rating of 18 times forecast earnings overvalues a much less bubbly outlook for the business. As such, I rate the stock a ‘sell’.

Shocking year

AIM-listed Internet of Things firm Telit Communications (LSE: TCM) was in the news for all the wrong reasons last year. The company’s profits collapsed. Also, its founder and chief executive Oozi Cats was exposed as Uzi Katz, who had fled fraud charges in the US in his earlier years.

Before all this, I’d warned readers of signs of aggressive accounting at Telit, notably, high and rapidly- increasing capitalised development costs. These flattered earnings, while the company delivered little, if any, free cash flow.

Telit as it is

Finance director Yosi Fait, who stepped into the shoes of the disgraced and departed Cats/Katz, impaired $8.4m of these capitalised development assets last year. Today’s interim results revealed a further impairment of $2.4m. However, at the same time, fresh costs of $13.7m were capitalised.

Despite what I consider a still-high level of capitalisation under Fait, Telit booked a net loss for the period of $11.9m, on 13.7% higher revenue. However, it reckons a stabilisation of gross margins, and cost optimisation, will improve performance going forward. It also expects to complete the sale of its automotive division by the end of 2018, which would strengthen its balance sheet.

Telit remains the subject of a Financial Conduct Authority investigation, as well as being embroiled in tax and civil litigation in Italy. There were no updates on these matters in today’s results. And with the accounts also failing to impress me, I continue to rate the stock a ‘sell’.

The post Is this FTSE 100 stock on the brink of issuing a profit warning? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.

Chief executive Yosi Fait told us that “we are making headway towards a return to being a sustainably cash generative business.”

The firm, which bills itself as “a global enabler of the Internet of Things,” saw its share price collapse in 2017, from 375p in April to only 102p by August. At 160p now, they could be on the way back, but what had previously gone wrong?

The market was shocked in August 2017 by the revelation that chief executive Oozi Cats had previously been indicted on fraud charges in the US and had withheld that from the Telit board.

As my colleague G A Chester explained, the firm suffered a breach of its debt covenants, and there was some interesting director dealing around that time. He also pointed out that the company’s impressive recorded profits were not, at the time, feeding through to cash flow.

Steering clear

After the share price slid a little, I’d thought the shares looked good value. But what a mistake that was, just a month before the news of Oozi Cats broke. There’s a lesson for me there, which applies to upcoming growth stocks. It’s common to see EPS growth and rosy forecasts, but it’s often not so easy to see actual cash in the early days — it’s often something we hope to see tomorrow.

The fact that Telit had already started paying dividends possibly also blinkered me to the troubles ahead, and with hindsight the company was paying out cash it couldn’t yet afford. The dividend was curtailed last year and there’s no sign of any resumption on the cards up to 2019.

Telit is very much a ‘once bitten’ stock for me now.

Second chance

If you want a FTSE 250 telecoms company that has done everything right and has been well managed, you might like the look of Telecom Plus (LSE: TEP). I was a big fan of Telecom Plus, which provides bundled telecoms and utilities services under its Utility Warehouse brand, in the early days. But we saw a typical growth share bubble, with everyone wanting in and pushing the share price up way too high. Peaking close to the 2,000p level, the resulting P/E multiples of around 40 were just not sustainable.

Now the price has fallen back to more realistic levels at around 1,150p, I’m starting to like the look of Telecom Plus shares again.

Results for 2017, released in June, showed a modest 3.4% rise in adjusted EPS, and the dividend was lifted by 4.2%. The latter is really what appeals to me, with the firm saying it “remains committed to a progressive dividend policy consistent with the underlying strong cash generation of our business.“

Forecasts suggest a stronger 9% rise in EPS this year, with the dividend yield set to grow to 4.5% — and to 4.8% by March 2020. Cover won’t be dramatic at a little under 1.2 times, but the clear visibility of revenues in the utilities sector means I’m happy with that.

Telecom Plus enjoys bulk-buying advantages which should help it compete successfully with other smaller utilities firms, and I see forward P/E multiples of 18 to 19 as representing good value now.

The post Why I’d dump Telit Communications shares and buy this FTSE 250 growth and dividend stock instead appeared first on The Twelfth Magpie.

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Alan Oscroft 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.

However, shares of the FTSE 250 group are trading 7% down at 147p. Is the market right to be wary or is this a good opportunity to buy a stake in the pet shops, grooming and vets business?

Doesn’t tickle my tummy

I last looked at Pets at Q3 time in January. I expected it to post a 12% fall in earnings per share (EPS) to 13.5p for the full-year and maintain its dividend at 7.5p. The share price was 195p, so the price-to-earnings (P/E) ratio was 14.4 and the dividend yield was 3.8%. I thought the ungenerous earnings multiple and ordinary yield looked poor value.

Today, we learned that Pets hit the 13.5p EPS number and also maintained the dividend at 7.5p. At the current share price, the P/E is down to 10.9 and the dividend yield is up to 5.1%, making the valuation significantly more generous than it was in January. However, I view this as still too pricey for a company where management is targeting low-single-digit earnings growth and where I see downside risk in a competitive market.

With the rollout of new stores, grooming salons and vet practices slowing and the board also indicating that there’ll again be no increase in the dividend, this is a stock I would be inclined to sell in favour of stronger growth-and-income candidates.

Lack of cash generation

While Pets’ problem is that it is essentially a business where I don’t see sufficient value for the growth on offer, Telit Communications(LSE: TCM) is a company riddled with issues.

In the spring of 2017, this “global enabler of the Internet of Things” was something of a darling with growth investors. However, in a detailed dissection of its cash flows, I showed how its impressive paper profits had been achieved by a dramatic escalation of capitalised development costs, and that the business generated little, if any, free cash flow.

Cats out of the bag

In August last year, founder and chief executive Oozi Cats was exposed as Uzi Katz, a long-time fugitive from fraud charges in the US. He was replaced by finance director Yosi Fait, who had sold all his shares in the company two days before a debt covenant breach on 30 June. The breach remained undisclosed until Telit’s interim results on 7 August.

Investors who had bought shares at 340p in a £39m placing in May might be wondering about the company’s financial position at that time, given that the covenant breach was just a few weeks later. As might the Financial Conduct Authority, which in March this year “commenced an investigation into Telit with regard to the timeliness of announcing certain matters including the interim results published on 7 August 2017.”

The company reported a $52m loss for 2017 and net debt of $30m at year-end. The profit and loss account took an $8m hit from an impairment of previous capitalised development costs but the company capitalised a further $31m for the year. At a current share price of 149p, Telit is valued at £194m and I continue to rate this AIM-listed stock a ‘sell’.

The post This FTSE 250 5.1% yielder isn’t the only stock I’d sell today appeared first on The Twelfth Magpie.

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G A Chester 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.

The Telit share price has fallen by 55% over the last year, in the wake of a scandal involving US fraud allegations against former chief executive Oozi Cats and various other problems.

Replacement chief executive Yosi Fait has since faced a number of of issues, including project hold-ups and delays with the certification of new products. Profit margins were also hit by a faster-than-expected shift to lower margin LTE (4G) mobile technology.

Although sales remained stable at $374.5m in 2017, lower profit margins and higher costs pushed the group to an adjusted pre-tax loss of $17.8m, excluding restructuring costs.

Mr Fait has promised “double-digit growth” and “a better financial performance” for 2018 so I’ve been taking a look to see if this high-tech turnaround a good bet for the future.

Margin pressure?

One of the biggest contributors to expenses last year was a massive increase in research and development spending, which rose from $38.3m to $66.9m. The company says that this was due to the cost of extra staff and an increase in certification costs.

Management is working to reduce R&D costs and expects to close a number of locations over the coming years. For 2018, Telit is targeting a $10m reduction in cash expenses, plus “stabilisation” of gross profit margins and double-digit sales growth.

This suggests to me that gross profit margins aren’t likely to rise. Any improvement in operating profitability will have to come from lower costs and higher volumes. I don’t know how achievable this is. In today’s results, Telit warned of lower margins on 4G technology in the US, and of growing Chinese competition in Europe.

I’m not convinced

Broker forecasts suggest Telit will report an adjusted net profit of $13.1m for 2018, with adjusted earnings of 10 cents per share.

This puts the stock on a forecast P/E of 21 for 2018. Personally, I’m not convinced by this growth story. I’d sell the shares at this level and invest elsewhere in the tech sector.

Being #2 is still profitable

Investing in market-leading companies is often a good strategy. But in some cases, being number two is enough to deliver scale and profitability.

One example of this is FTSE 250 firm ZPG (LSE: ZPG). Formerly known as Zoopla, this firm’s main business is its property website. But to compensate for the fact that it will probably always rank second to Rightmove, it is expanding sideways into other related areas.

The firm’s assets now include price comparison website USwitch and property valuation business Hometrack. This growth strategy has pushed operating profit up by an average of 42% per year since 2011. Although profit growth has slowed in recent years, it’s worth noting that operating profit rose by 8% to £53.7m in 2017.

I’d buy at this level

Analysts expect ZPG’s adjusted earnings to rise by 17% to 17.8p per share this year. The group’s dividend is expected to rise by 21% to 6.9p. This puts the stock on a forecast P/E of 19.5, with a 2% yield.

Although this may not seem cheap, I believe this firm’s proven growth potential and profitability is likely to result in further gains for shareholders. I’d continue buying at current levels.

The post One high-growth FTSE 250 dividend stock I’d buy with £2,000 today 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 recommended Rightmove. 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.

Today, I’m looking at another two stocks that are currently being shorted heavily. Don’t say you haven’t been warned.

Premier Oil

Premier Oil (LSE: PMO) is an independent exploration and production company with oil and gas interests in the North Sea, South East Asia, Pakistan, the Falkland Islands and Latin America.

The stock, which is popular among UK small-cap investors, has soared from 44p in June to over 90p today. However, before you get too excited, there’s something you should know.

The £520m market cap company is currently the fourth most shorted stock in the UK. According to shorttracker.co.uk, seven funds are currently betting against the stock. 13% of the shares are being shorted. That signals trouble to me. So what’s wrong with the firm?

The most likely reason for the large short interest, is the company’s mammoth debt pile. The oil explorer had net debt of $2.7bn at 31 December, an astronomical figure given its market capitalisation. The company had total equity of just $800m on the balance sheet last year.

A trading update this morning revealed that full-year production for 2017 will be in line with guidance and that output is expected to rise by more than 10% in 2018. The company also noted that the first oil had been achieved from its Catcher field “on schedule and under budget.”

However, with such a large debt pile and considerable short interest, I’d be hesitant to invest in Premier Oil right now.

Telit Communications

Another company with a heavy chunk of short interest is Internet of Things specialist Telit Communications (LSE: TCM). I was bullish on Telit at the start of last year, as the growth story looked compelling. However, in hindsight, I should have paid more attention to the shorters. CEO Oozi Cats was accused of fraud, and Telit’s share price got walloped.

The stock has bounced almost 50% from its August lows, yet at the same time, it has climbed up the list of the most shorted stocks. It’s now the fifth most shorted stock in the UK, with 11.6% of its shares being shorted.

The high level of short interest in understandable. For starters, the group released a profit warning in September, stating that it expects adjusted EBITDA for the year to be “materially below previous guidance.”

There’s also a lack of corporate governance here. For example, interim CEO Yosi Fait sold £1.5m worth of shares in June, two days before the company failed to meet one of its banking covenants. This was only revealed in August.

Lastly, it was revealed in November that the FCA was making preliminary enquiries into the company’s disclosures.

All in all, Telit is a stock to steer clear well clear of, in my view.

The post Beware: Premier Oil plc is on the ‘most dangerous’ list appeared first on The Twelfth Magpie.

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Edward Sheldon 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.

The shares are up over 8% at 510p, as I’m writing, valuing this FTSE 250 firm at £1.7bn. It’s a well-managed business, boasts net cash on its balance sheet and has excellent geographical diversification. So why is it a stock I’d sell?

What value growth?

The company reported a gross profit of £711.6m for 2017, up 14.6% on the prior year and a still-excellent 9.9% at constant exchange rates. The performance was strong across all geographies, with the exception of the UK (20% of group profit), which declined 3.8% year on year.

Based on the upgraded guidance on operating profit, I reckon we’re looking at earnings per share (EPS) of around 27.5p for 2017 (19% up on 2016). This puts Page on a price-to-earnings (P/E) ratio of 18.5 and a price-to-earnings growth (PEG) ratio a tad to the value side of the PEG fair value marker of one.

However, looking ahead, management is cautious on the UK (due to “ongoing uncertainty around the macro environment”) and also on Australia and Brazil. As such, I don’t see much scope for increasing the pre-update 8% EPS growth analysts were forecasting for 2018. Erring on the generous side, I pencil in 30p EPS for the year, which gives a P/E of 17 and a PEG of 1.9. As the latter is significantly above PEG fair value, I rate the stock a ‘sell’.

Reasons for scepticism

While I see Page as a solid company I’d be happy to invest in at a lower valuation, Internet of Things specialist Telit Communications (LSE: TCM) is a company I’ve been deeply sceptical about.

Going back to March last year, I wrote about the gulf between its impressive paper profits and far-from-impressive cash flow. By August, its founder and chief executive, Oozi Cats, had departed after revelations he’d fled fraud indictments in the US in the 1990s. And by November, I continued to see the company as uninvestible for a number of reasons. Has news from the company since then changed my view?

Boardroom changes and swing to loss

In the boardroom, Telit appointed a new non-executive chairman and a new senior independent non-executive director. Finance director Yosi Fait, who stepped into Mr Cats’s CEO shoes, was given the gig on a permanent basis. He’d sold all his shares two days before an impending debt covenant breach on 30 June but the new non-execs were satisfied that, “having examined the share trading with the assistance of external legal advice, on this basis that it was lawful.”

On the business front, Telit issued a profit warning, saying it “expects adjusted EBITDA for the year to be materially below previous guidance.” Today it’s announced an “expanded strategic partnership” with a telematics company but with no detail on how much it might be worth. Meanwhile, it’s aiming to cut costs and remains in discussion with its lenders about amending its debt covenants.

Trading at 152p, with a market cap close to £200m and forecast to report an annual loss of £10m, I continue to rate this AIM-listed stock a ‘sell’.

The post Two growth stocks I’d sell right now appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
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G A Chester 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.

I am less optimistic over the investment profile of Telit Communications (LSE: TCM), however, even if latest trading details released on Friday stopped the recent stream of disastrous market updates.

The AIM-quoted firm announced that revenues clocked in at $255m between January and September, and that it remains on course to hit the downgraded targets laid out in November. Telit cut its earnings targets then due to greater-than-expected “pressure on gross profit margins stemming from the transition from 2G and CDMA products.” These technologies have larger margins than the newer LTE products.

Today the business also affirmed hopes that sales should detonate sooner rather than later, the internet of things enabler saying that US certifications last year should underpin “double-digit revenue growth” in 2018. And in other news, the tech colossus said that cost-cutting initiatives should reduce cash operating expenses by $10m next year, down 7% from this year’s anticipated levels.

Dividends set to dive

Now Telit has record blistering profits growth over the past five years but, in acknowledgement of the company’s current margin problems, the City is expecting earnings to skid 52% lower in 2017.

The prospect of diving profits is expected to weigh on dividends also. Last year’s payment of 7.4 US cents per share is expected to skid to 3.1 cents in 2017, resulting in a yield of just 1.4%.

On the plus side, the Square Mile is anticipating that earnings will bounce 67% in 2018, and that this will drive the dividend to 7.4 cents and therefore the yield to a much-improved 3.4%.

But in my opinion there is still too much adverse noise facing Telit right now to justify investment. Of more immediate concern is the state of the firm’s balance sheet, particularly after it warned today that it is in advanced discussions with a lender so as not to breach its debt covenants in the coming weeks.

With the Financial Conduct Authority also having launched “preliminary enquiries” into the firm last month following the much-publicised boardroom intrigue, and the business also carrying a slightly-expensive forward P/E ratio of 17.4 times, I see little reason to buy today.

Monster yields

At the opposite end of the scale, City analysts are quite chipper over Headlam’s earnings outlook in the near term and beyond.

During 2017 the Birmingham business is predicted to churn out a 6% earnings improvement, keeping its recent record of robust growth going. And in 2018, forecasts suggest that a return to double-digit growth is just around the corner, an 11% improvement currently suggested.

These predictions make Headlam a snip, its forward P/E ratio of 12.9 times falling well below the widely-accepted value watermark of 15 times.

And as I said earlier, the flooring giant also offers lots for dividend chasers to get their teeth into. Headlam has lifted the ordinary full-year dividend at a compound annual growth rate of 8.7% over the past five years whilst it has also furnished investors with special dividends in that time.

Last year’s 22.55p per share ordinary dividend is predicted to rise to 24.7p in the outgoing period, and again to 26.8p in 2018. As a consequence Headlam boasts gigantic yields of 4.7% for this year and 5.1% for next year.

The post 1 growth and dividend share you might regret not buying appeared first on The Twelfth Magpie.

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Royston Wild 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.

And today shares in Telit are falling once again after the company issued a profit warning and announced several key management changes. 

All change 

After the Cats saga, Telit has decided to shake up its management team. Interim CEO Yosi Fait will now become the group’s permanent leader and the former chairman of gambling group 888 Holdings, Richard Kilsby has been confirmed as the new non-executive chairman. Meanwhile, COO Yariv Dafna has been appointed as finance director. 

Telit’s new management is committed to “applying the highest standards of corporate governance and transparency across the group,” according to Kilsby, which should come as a relief to investors as it now looks as if the company is trying to draw a line under its disastrous past. 

Unfortunately, these positive board changes were accompanied by a profit warning from Telit. The company has already lowered expectations this year, cutting guidance in September due to tougher than expected trading. Full-year revenue guidance was slashed to between $390m and $400m and earnings before interest, tax, depreciation and amortisation to $44m to $48m. These figures were significantly below the EBITDA figure of $54.4m reported for 2016. 

Today the firm announced that it expects to report results for 2017 “materially” below this guidance thanks to pressure on gross profit margins as it transitions from mature technologies. 

Fallen angel 

Over the past few years, Telit captured investors’ imaginations as the company’s exposure to the fast-growing internet of things market (IoT) gave it enormous growth potential. Indeed, only a few months ago, analysts were expecting the company to report bottom line growth of 68% thanks to higher demand for its products. 

However, while some investors have been mesmerised by its explosive growth, analysts have expressed concern about the company’s cash generation or lack of it. 

For example, even though net income has risen from £4m in 2012 to £17m for 2016, over this period the company reported a net cash outflow of £18m. Debt and shareholder cash has filled the gap. Earlier this year, the firm raised £39m by way of a placing and since 2012 total debt has risen by a third. 

This is why I’m staying away from Telit. Even though the company’s net income has multiplied over the past five years, the group has struggled to generate a positive free cash flow. 

In business cash is king, and without cash, it’s only a matter of time before the company will have to raise new funds from investors. Overall, Telit’s new management might be committed to restoring the firm’s reputation, but until the group starts to generate cold hard cash, I’m happy to avoid it. 

The post Why I’d avoid trying to catch this falling knife after today’s 15% slump appeared first on The Twelfth Magpie.

More reading

• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• 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?

Rupert Hargreaves owns no share 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.