A little over a year ago, the company was in the doghouse as it fought against weak sales and rising costs. Since then, however, the turnaround under CEO Peter Pritchard has been nothing short of superb. From a low of around 115p in November 2018, shares in the Wilmslow-based business have appreciated a touch over 150%.

Today’s trading update suggests there could be more upside ahead with the company reporting a “record-breaking performance” in its Retail division in Q3. Revenue here rose 7.2% with omnichannel sales (which includes orders placed online) rocketing 23.4%.

Highlighting just how lucrative anything related to our furry (and not so furry) companions can be, a 14.4% rise in revenue at its veterinary services was also logged “with mature practices growing ahead of the market“.

All told, total revenue growth of 7.9% to just under £256m was recorded for the 12-week period from 11 October to 2 January. Based on this performance, Pets made no changes to the financial guidance it issued back in November, stating that expectations for underlying pre-tax profit remained “in line with current market consensus“. 

Clearly not the bargain they once were, the shares were trading on 20 times earnings before the markets opened this morning. While I wouldn’t necessarily fight to build a position at the current price, the resilient nature of the industry leads me to think that those already holding shouldn’t dash to bank profits either. A projected total dividend of 7.53p per share in the current year gives a yield of 2.6%, covered almost twice by profits.

Back on track

Another stock that’s recovered well in recent times has been laser-guided equipment manufacturer Somero Enterprises (LSE: SOM). Available for 187p a pop back in October, the shares now trade a little over 50% higher following today’s reassuring update on trading. 

Thanks in part to better weather in the US allowing previously delayed building projects to commence, Somero announced that it had seen “strong, profitable trading” in the final quarter of its financial year. As a result, management now predicts annual revenue will come in “modestly ahead of the top end of guidance” provided back in July 2019.

Looking ahead, it said that it expects 2020 will be “a profitable year” for the company. That said, revenues and earnings are likely to be similar to those seen in 2019 due to increased investment in its SkyScreed product. Issues in non-US markets already impacted by economic uncertainty are also likely to “slightly temper” growth expectations, the small-cap said.

Somero’s shares were changing hands for a little less than 10 times forecast FY20 earnings before markets opened. Even after taking today’s 10% rise into account, this kind of valuation still looks cheap for a firm with operating profit margins and returns on capital of around 30% and 50% respectively, 

The bulletproof balance sheet is also worth mentioning. Net cash of $23m at the end of 2019 — far better than the $18m predicted last July — should ensure that Somero is able to stick with its generous dividend policy going forward.

The cyclical nature of the business may still be enough to put some investors off but, like Pets, I see no reason for relatively new holders to bag profits just yet.

The post This FTSE 250 stock isn’t the only company bouncing back to form appeared first on The Twelfth Magpie.

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Paul Summers owns shares of Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

You can find out more about this kind of account here. For now, however, I want to tell you about two stocks that, while currently unloved by the market, could turn out to be excellent, long-term recovery stories — something that SIPPs are perfectly geared to.  

Time will tell 

Zigging while other investors are zagging rarely feels comfortable, but that’s partly why I’ve become increasingly positive on battered retailer Superdry (LSE: SDRY) over the last couple of weeks.  

In my opinion, the recent boardroom coup by founder Julian Dunkerton should mark the beginning of a new, optimistic chapter in the retailer’s story. He undoubtedly faces a tricky few years ahead but I suspect he’s likely to make a better job of resurrecting Superdry than the old board.

For one, Superdry’s shares now trade almost 80% below the high hit back in January 2018, and yet the returning director still owns a good chunk of the company.

If we go by the maxim that those with sufficient ‘skin in the game’ will always be more incentivised to hit targets, then I’d say this bodes well. Note that Dunkerton has also promised not to sell any shares for the next two years.

Some ‘kitchen-sinking’ is somewhat inevitable over the coming months, not to mention share sells by those institutional investors that opposed his return.

Nevertheless, I think the stock looks good value, trading as it does on a P/E of just 8 for the next financial year (although analyst estimates could be revised later in 2019).

Superdry lost its way but, with reduced discounting, a return to its “design-led roots” and a highly motivated leader back at the helm, money could be made by taking a stake at some point over the next six months or so.

The worst might be over

On the face of it, buying stock in CMC Markets (LSE: CMCX) looks a risky bet. New regulations and reduced client activity have led to a huge reduction in revenue in recent times, and CMC’s share price has dived 55% over the last 12 months as a result. Peer IG Index (where I now hold a long position) has also suffered.

That said, I suspect we could be getting close to the point of maximum pessimism. In its most recent trading update, the company said CFD and spread-bet revenue would come in around £110m for the 2018/19 financial year — 37% lower than in 2017/18.

While clearly not great news, CMC did go on to say that the impact of new rules was “showing signs of stabilising.” Active and new client numbers are steady and the company is sticking with its outlook for the next financial year, supported by the growth of its stockbroking business in Australia. 

Calling the absolute bottom is hard, if not impossible to do on a consistent basis and we at the Fool UK recommend private investors shouldn’t try.

As such, I think a forward P/E of 10 already looks pretty cheap and brave investors could be rewarded when market volatility inevitably returns. 

The post 2 cheap turnaround stocks I’d snap up for my 2019 SIPP appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry. 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.

“Well on track”

Total revenue rose 2.7% to £17.7bn with like-for-like sales rising 4.8% compared to 2.8% in the previous year, thanks to contributions from its wholesale division’s partnerships with Amazon and McColl’s.

Pre-tax profit rose 8.6% to £406m, although one-off costs relating to items such as property disposals brought the latter down to £320m.

Having been brought in to steady the company back in 2015, CEO David Potts is understandably pretty happy with how things are going, stating that Morrison’s “third consecutive year of strong sales and profit growth” was further evidence that “the Morrisons turnaround is well on track.”

Despite the ongoing debacle that is Brexit continuing to make consumers cautious over what and how much they buy, the company also said it still had “many sales and profit growth opportunities ahead.”

Indeed, so confident is the business in its future, it announced another special dividend of 4p per share. This brings the total dividend for the year to 12.60p — a little under 25% higher than last year and giving a trailing yield of 5.6%. 

All priced in?

After initially rising as the market opened, Morrisons’ shares were trading flat at lunchtime, suggesting that investors were satisfied, although perhaps not necessarily overwhelmed, by today’s figures. Events at Westminster may also be playing a role. 

Nevertheless, today’s reaction somewhat mirrors my rather apathetic attitude towards the stock as things stand. While news of a special dividend should be welcomed, it’s worth remembering that dividend investors haven’t had the easiest ride from supermarkets over the last few years, Morrisons included (it last cut its payout in 2016). If you’re looking for more reliable income, I think there are better options in the FTSE 100. 

In addition to the above, I’m struggling to see the attraction of owning a slice of a supermarket that trades on 16 times forecast earnings for 2019/20. Granted, that’s not ludicrously expensive compared to some high growth stocks, but it does feel a bit dear for a company that fails to really stand out in the grocery sector. The aforementioned wholesale supply deals are clearly working well — £700m of sales this year, with £1bn targeted going forward — but current market share data suggests this is a company forever running to stand still. 

Regardless of how well managed it is, data from Kantar Worldpanel shows Morrisons is still very much in fourth place in terms of popularity, behind Asda, Sainsbury’s and market-leader Tesco. With no sign of momentum slowing at discounters at Aldi (only 3% behind Morrisons), I’d be more concerned about the company protecting its fourth spot rather than taking the fight to its larger rivals. 

So, while I wouldn’t necessarily be running for the exits, today’s lukewarm reaction from market participants leaves me asking what the company must do to lift the share price back to the 300p mark, last breached at the end of 2011. I don’t have an answer to that and that’s sufficient for me to refrain from getting involved. 

The post This FTSE 100 turnaround stock may be showering cash on its owners but I’m still not tempted appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

Since March 2017, the company has lost almost 60% of its value on fears over the trimming of advertising budgets by clients, the loss of contracts with others and the acrimonious departure of its founder and former CEO Martin Sorrell.

Today’s full-year results might not be enough to get the market back on the company’s side completely, but they do suggest the £10bn cap juggernaut is slowly turning itself around. 

Not great but not awful

Although falling 0.4% last year, like-for-like revenue less pass-through costs was still better than the range predicted by WPP back in October (between 0.5% and 1%).

Even so, total revenue fell 1.3% over 2018 to £15.6bn. Pre-tax profit also tumbled 30.6% to £1.46bn, partly due to restructuring costs.

Commenting on these numbers, new(ish) CEO Mark Read stated that WPP had made “good progress” over 2018.

While still in the early stages, the three-year turnaround plan to position itself “as a creative transformation company with stronger, more integrated, more tech-enabled agencies” was “already proving effective“.

Geographically-diversified WPP also said that it was “performing strongly in Western Continental Europe, Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe” while attempting to sort things out its US operations.  

Having made 36 disposals in the last 11 months for a total of £849m, WPP’s finances also look more robust than before. At £4.017bn, net debt was £466m less at the end of last year compared to 2017.

Value and income

The stock jumped almost 7% as markets opened this morning, suggesting that results had surpassed investors’ expectations. Should we take this as a sign that WPP’s darkest days are now behind it?

It’s a tough one. Despite recent progress, WPP’s leader reiterated the company’s view that 2019 would be “challenging” (especially in the first six months) as a result of client losses in the previous year.

On a more positive note, Mr Read added that fewer clients were under review than in 2018 and that investment would make the company more competitive in winning business going forward. 

Right now, analysts are forecasting a further drop in earnings, which left the company’s stock trading on a forward P/E of just less than eight before markets opened. Despite WPP’s recent travails — not to mention the ongoing political and economic uncertainty — I still think that looks cheap.

But WPP shouldn’t just be seen as a value play, in my opinion. Those investing for income might also be reassured by the fact that its dividends — while not rising — do look safe for the time being.

The total payout for 2018 was maintained at 60p per share, leaving the stock on a trailing yield of 6.8% after taking into account today’s share price rise.

Even if it doesn’t grow, next year’s cash return is likely to be covered 1.7x by earnings. Two times cover is preferable but this is certainly not as fragile a position to be in compared to some income favourites in the FTSE 100. 

All told, I continue to believe that WPP’s stock offers great value for patient, contrarian investors, even after today’s positive reaction. Although there could be further weakness in the months ahead, I’ll stick my neck out and say that another huge drop looks unlikely. 

The post Is this FTSE 100 turnaround stock now superb value? appeared first on The Twelfth Magpie.

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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.

One company that continues to fall into the latter category, in my opinion, is FTSE 250 constituent Royal Mail (LSE: RMG). 

Back in November, I suggested that its chunky dividend yield wasn’t worth the risk of further price declines. Nothing has occurred in the time since to change my mind. Indeed, I’m beginning to think a dividend cut is now more likely than ever to feature in new CEO Rico Back’s strategy for the company when it’s revealed in March.

Tuesday’s trading statement — covered by my Foolish colleague G A Chester — was poorly received by the market and resulted in another steep decline in the share price. 

Having lost a little over 55% in value since last May, Royal Mail’s shares now trade on a little below 10 times earnings (based on expected EPS of 27.1p). Considering the structural decline of its letters business and concerns over competition from parcels-focused rivals, that still looks too high.

Value hunters should wait until later in the year before re-assessing the investment case, I feel. 

Another loser

But Royal Mail isn’t the only stock in the second tier I’d continue to steer clear of.

Broadband provider Talk Talk Telecom (LSE: TALK) is potentially an even worse pick, despite lots of chat about rising customer numbers in today’s Q3 trading update. 

Talk Talk saw its customer base grow by 44,000 over the period. When combined with data from the other two quarters, the company has now added 148,000 accounts to its books in the financial year to date. Considering that it was forecasting “in excess of” 150,000 for the 2018/19 year as a whole, that’s pretty good going. 

Total headline revenue over the three months to the end of December also rose 2.9% to £386m, although the amount of money made from each customer fell by 2% to £24.70 compared to the previous year.

Looking ahead, the firm said that it was still “confident” of strong earnings growth in FY20 thanks to “customer momentum and cost savings” — the latter the result of the ongoing reorganisation of the business.

Nevertheless, accounting adjustments and further investment in order to lure customers have led Talk Talk to state that underlying profit for this year is now likely to be between £245m and £250m — down £10m-£15m on the consensus estimate from city analysts. This goes some way to explaining why the share price has fallen again this morning.

Away from today’s numbers, I also continue to be wary of the mid-cap’s balance sheet.

Talk Talk had £800m in net debt at the half-year point, almost two-thirds what the company is worth today. That’s too big a burden for me.

Dividends, while safely covered by profits, aren’t exactly attention-grabbing either.

The company is forecast to return 2.5p per share this year, equivalent to a yield of 2.4% at a share price of 103p. As far as I’m concerned, you could get far more from considerably better businesses elsewhere. 

All this, when considered alongside the fact that Talk Talk’s shares traded on a pretty dear 20 times earnings before this morning (despite being in derisory form for many years), suggests that the company continues to offer pretty poor value as an investment. 

The post Royal Mail isn’t the only battered FTSE 250 stock I’d still avoid like the plague 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?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

With the company’s share price hitting record highs, should investors pile in and ride the momentum?

Expectations-beating

At £234m, group revenue was 7% higher (or 10% at constant currency) year-on-year over the four months to the end of April. 

Broken down, revenues at its Aerospace, Defence and Energy (ADE) division climbed 5% to £94m.  Although income connected to civil aerospace was impacted by lower demand in France, overall growth of energy revenues hit 24% over the reporting period (thanks to a strong performance in North America). 

Elsewhere, Bodycote’s other arm — Automotive and General Industrial (AGI) — saw a 9% increase to £149m with car and light truck revenues rising 8%, partly thanks to “strong growth in Emerging Markets“.

Pleasingly, the £1.8bn cap’s balance sheet continues to look robust with a net cash position of £45m at the end of the reporting period — £5m higher than at the end of the last calendar year. While its growth credentials mean that it’s unlikely to be a priority investment for income seekers, confirmation that management had approved a 25p per share special dividend in addition to the final payout of 12.1p per share will no doubt be welcomed by its owners. 

Looking ahead, Bodycote believes full-year revenue will now come in higher than expected and that operating profit will slightly exceed analyst predictions.

At 18 times earnings before today, however, its stock was already looking pricey relative to industry peers. So, while today’s positive numbers suggest that investors should expect to pay a premium, I’d be tempted to wait for a likely period of profit-taking to subside before moving in. 

Is the recovery on?

Another riser today was banknote designer and manufacturer De La Rue (LSE: DLAR) — a company which made headlines earlier in the year after losing the tender to produce the new, post-Brexit blue passports to Franco-Dutch competitor Gemalto.

Having grown accustomed to profit warnings, investors appeared relieved with the mid-cap’s latest set of full-year numbers.

In the 12 months to the end of March, group revenue rose 7% to slightly below £494m. As expected, adjusted operating profit fell (by 11% to £62.8m), although this rose 7% when its now-sold paper business is excluded from calculations. 

De La Rue’s goal to evolve into “a less capital-intensive, more technology-led business” appears to be going well with CEO Martin Sutherland stating that its non-printing divisions — focusing on areas such as security, product authentication and traceability — now contribute more than a third of total revenue and over 50% of operating profit. 

News that net debt had reduced by £71m to just under £50m was also cheered. It was the lowest for five years and was thanks to the Basingstoke-based business receiving £60.3m cash from the aforementioned sale. 

With the full-year dividend unchanged at 25p, the 12-month order book 6% up (to £363m) on the previous year, new strategic partnerships, and increased R&D investment, I wouldn’t be surprised if value hunters and contrarians were to begin reassessing the company.

At 12 times forecast earnings for the new financial year and continuing to register excellent returns on the capital it employs, today might just mark the beginning of a sustained recovery for De La Rue. 

The post Why I’d consider buying this FTSE 250 growth stock alongside this battered mid-cap appeared first on The Twelfth Magpie.

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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?
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Bodycote. 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.

Back in February, the star fund manager increased his holding in troubled roadside recovery and insurer AA (LSE: AA) after it downgraded profit forecasts and slashed its dividend to invest in and grow the business.

Will this gamble pay off? While market reaction to this morning’s full-year results suggests the worst might be over, I’m still wary of the stock.

Let’s look at the numbers in a bit more detail.

“Solid performance”

Revenue rose 2% to £959m in the year to the end of January. Broken down, the vast majority of this (£814m) came from the AA’s Roadside division. Here, new memberships increased by 7% although paid membership dipped 1%.

According to the company, more than 1 million members have downloaded its breakdown app and used it in just under 30% of incidents. Car Genie — AA’s intriguing technology that could help predict when mechanical problems might be encountered — has also been employed in 6,000 vehicles since being launched last August. 

AA’s remaining revenue came from it Insurance arm, which rose 11% thanks to a focus on the “core products” of motor and home insurance (with a slower-than-anticipated decline in the latter).

In line with guidance, earnings before interest, tax, depreciation and amortisation (EBITDA) fell 3% to £391m. 

Having delivered what he labelled as a “solid performance” last year, CEO Simon Breakwell assured loyal holders that AA had also made a “positive start” to 2018/19, adding that its board remains “confident” that its financial requirements are “well funded”. 

Taking into account the aforementioned investment, the company reiterated its prediction that earnings for the next financial year would be somewhere between £335m and £345m. It expects to remain cash generative in 2019 with free cash flow targets of over £80m in FY20 and “in excess of £100m per annum thereafter“.

Patience required

Since a lot of negative news was arguably already priced-in, it’s perhaps no surprise that AA’s shares were sharply higher this morning.

Despite this, there’s no getting away from the fact that debt levels remain seriously high and that AA’s road back to health will be anything but short (assuming it isn’t acquired beforehand). While the cost of borrowings has been “reduced“, net debt still stands at 2.7bn — almost four times the current value of the company (£700m).

Confirmation that the total dividend has been slashed 46% to just 5p per share also means that investors aren’t really being adequately compensated for the risk they are taking. Worse still, this payout will now be reduced to 2p per share per annum from the next financial year “until profit and cash flow enables a change in the policy”.

There’s also the small matter of the company facing a £225m damages claim from ex-executive chairman Bob Mackenzie, sacked from last year for gross misconduct following a brawl with a colleague. Although AA expects to be successful in this case (and will attempt to recover the estimated £1m in legal costs in damages), this is not the sort of situation I’d really want hanging over a business that I part-owned when there are so many better opportunities elsewhere.

At around 7 times trailing earnings, shares in AA certainly look dirt cheap but surely only the most patient value investors — such as Woodford — need apply? 

The post Why I’d continue to shun this Neil Woodford backed 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?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

Massive rise in profit

Hailing “another strong year of progress“, this morning saw the company revealing an almost 800% rise in pre-tax profit to £1.3bn compared to just £145m the year before.

Sales rose 2.3% (or 0.6% at constant currency) to £51bn with the company registering its ninth consecutive quarter of like-for-like growth in Q4.

Despite the ongoing battle with German discounters Lidl and Aldi, the Welwyn-based business welcomed 260,000 more customers through its doors with like-for-like sales in the UK rising 2.2% thanks to “consistent strength” in fresh food. Operating margins also increased to 3% in the second half of the financial year, allowing the retailer to remain confident that it will achieve its target of 3.5%-4% in 2019/20.

Tesco’s balance sheet is beginning to look far more robust with net debt falling just under 30% to £2.63bn. The FTSE 100 constituent’s total indebtedness now stands at £12.3bn — £4.4bn lower than in the previous year. 

Over the year, Tesco achieved cost savings of £594m, bringing the total amount to date to £820m — well over halfway towards its £1.5bn target over the medium-term. Positively, the completion of its merger with wholesaler Booker in March should lead to savings of “at least” £200m a year, the company estimates.

Commenting on results, CEO Dave Lewis — brought in to steady the ship during following its infamous accounting scandal and general loss of focus — said that today’s numbers put Tesco “firmly on track” to meet its targets over the medium term. The brand was now “stronger“, he enthused, with more shoppers recognising the improvements made over the last few years. Based on these numbers, it’s hard to disagree.

Now a buy?

Since June last year — and taking into account this morning’s favourable reaction from the market — Tesco’s shares have climbed an encouraging 34%. Although future performance will be decided by a myriad of factors, including the health of the UK economy in general, I think there could be more to come.

According to the latest data from Kantar Worldpanel, Tesco continues to outperform rivals such as Sainsbury’s and Asda while also arresting the fall in its market share, which still stands at a commanding 27.9%. With the capture of Booker now allowing the company to sell its own goods in Budgens and Londis convenience stores, I continue to think the £20bn cap is a far safer bet than any of its listed industry peers.

The resumption of dividend payments to holders is a further incentive for market participants to reconsider the stock. As a result of recent stellar performance and management’s confidence in the future, Tesco declared it would award a final dividend of 2p per share, bringing its total dividend for 2017/18 to 3p per share. While only representing a yield of 1.35% based on today’s share price, analysts have already pencilled in a 71% hike in the next financial year.

Bearing in mind the ongoing pressure on costs, it goes without saying that the grocery market will remain as tough as ever going forward. Nevertheless, today’s upbeat news does suggest that Tesco’s revival is almost complete.  

The post Is Tesco’s share price about to return to 300p? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

SUSE

Looking ahead, however, it’s important to realise that there’s more to Micro Focus than its HPE business. One key reason why I think there’s significant upside to its shares is its SUSE product portfolio, which has been delivering sustainable and profitable growth. SUSE is a developer of open source software, providing software-defined infrastructure and application delivery solutions.

I believe the potential of this fast growing business is being overlooked due to the uncertainty surrounding its integration of HPE. Considering SUSE is seeing robust double-digit revenue growth, if things go to plan the division could become a major driver of growth for the company.

Meanwhile, management insists that the fundamental thesis of the HPE software acquisition remains intact. And in a sign of confidence towards the firm’s turnaround prospects, five board members have bought nearly £700,000 worth of shares in the week following its trading update. It’s always reassuring to see the board show faith in the company’s outlook, especially since executives and directors are intimately acquainted with the health of the company.

Valuations

Shares in Micro Focus have now lost just over two-thirds of their value since peaking in November last year, while valuations have fallen to historic lows. The company is now trading at just 7.9 times its adjusted earnings last year, which implies the stock is in deep-value territory.

Although nothing is guaranteed, I’d be surprised if it was still trading at these levels in a year from now. Sure, investor sentiment won’t bounce back straight away and there may be further disruption from its HPE integration, but in the long run markets are value-driven.

Another turnaround play?

Looking elsewhere, public transport operator FirstGroup (LSE: FGP) could be another turnaround play. Shares in the bus and rail operator have lost nearly 40% of their value over the past 12 months and currently trade at a mere 6.6 times its forecast earnings this year.

While it still faces some serious challenges, most notably the continued demand weakness in its UK and US bus markets, it is making good progress in a number of areas too. A serious effort is being made to fix its UK bus division, with a strategy to increase efficiencies and maximise patronage expected to result in improved margins and bottom-line growth.

The financial performance of its UK rail business has also been better than expected, leading to a substantial improvement in cash flow generation for the group. Looking ahead, things look sanguine for its rail division, as FirstGroup seems set to keep its lucrative Great Western rail franchise until 2024.

High debt pile

On the downside, dividends are still elusive as the firm grapples with its high debt pile. Although net debt fell by 21% in the six months to 30 September 2017, it stood at £1.18bn, or around 1.7 times EBITDA.

There’s also a lot of uncertainty surrounding its near-term earnings outlook. A 1% decline in adjusted earnings for the 12 months to March 2018 is currently anticipated by City analysts, following intensifying airline competition on its long-haul Greyhound routes and extremely challenging weather conditions this past winter.

The post Why shares in Micro Focus International plc could bounce back appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. 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.

While the stock market will always be forward looking, I can’t help but think that this feels like yet another overreaction from investors, particularly when the numbers contained in today’s latest set of full-year results are considered.

In the year to 27 January, group revenue rose 9.6% in constant currency to £591.7m. Once exceptional items are stripped out, pre-tax profit climbed 12.3% to £68.8m.

Broken down, retail sales in the UK and Europe rose 6.4% to a little over £301m, once foreign exchange fluctuations were taken into account. Sales in US and Canada fared even better with the company generating £120.1m — a rise of 12.4%. The biggest (percentage) growth, however, was seen in the company’s online business. E-commerce sales soared 39.8% to £101.1m.  

Given the above, it’s understandable that the total dividend was hiked by 12.1% (to 60.1p), continuing the trend for double-digit increases seen in recent years. While the majority of Ted Baker’s current owners are unlikely to be too concerned with generating income at the current time, this kind of confidence on the part of management shouldn’t be dismissed.

With new stores and/or concessions planned in Europe, US, Mexico and Japan, not to mention ongoing investment in its e-commerce offering, 2018 looks like being another busy year for the £1.3bn-cap. Although no company in this industry can afford to take anything for granted, it’s interesting to note that it is already predicting “high single-digit sales growth” at its wholesale business. So long as retail sales remain healthy, I can’t see investors abandoning the stock for long.

All told, I’m tempted to think that today’s dip provides a decent entry point for those who already had the stock on their watchlists but were concerned over the company’s relatively high valuation. 

Return to profits

Up until very recently, the performance of shares in fellow fashion retailer French Connection (LSE: FCCN) was pretty uninspiring. All that changed earlier in March following the release its latest full-year results.

In the 12 months to the end of January, the company saw group revenues rise 0.5% to £154m. Although retail revenue dipped 5.5% (or -6% at constant currency) to £83.1m, sales at its wholesale business climbed 8.6% to £70.9m. Elsewhere, e-commerce revenue grew by 3.1%.

As a result of its “ongoing portfolio rationalisation“, chairman and CEO Stephen Marks said the business had made “considerable progress” over the last year and was now “very close” to becoming profitable again. The company revealed an underlying operating loss of £600,000 — an improvement of £3.7m in the previous year. Cue a 75% rise in the share price.

Can French Connection continue this form? With spring orders apparently “well ahead of this time last year“, it’s not out of the question. Following last year’s unsolicited approach from a “a third party in the US“, there may even be another bid for the company at some point. 

Nevertheless, I’m comfortable sitting on the sidelines for now, given the uphill challenges still facing the company, the lack of dividends and ongoing concerns over the health of the UK retail market. 

The post Why I’d buy this top quality growth stock over this turnaround contender 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?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker plc. 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.