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Are these 2 mid-caps a bargain buy after recent news?

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I believe there are some keen bargains to be found among mid-cap stocks at the moment. Two potential contenders are troubled aerospace firm Cobham (LSE: COB), and financial trading group Plus500 Ltd (LSE: PLUS).

Both companies issued trading updates this morning. There was more bad news for Cobham investors, whose shares are down by 15% after another profit warning.  Third-quarter figures from Plus500 seemed OK to me, but investor confidence remains shaky after a recent share sale by management.

In today’s article I’ll dig into today’s news in more detail and ask whether Cobham and Plus500 offer compelling value at current levels.

A 7.8% yield for bold buyers?

Revenue at Plus500 rose by 14% to $236.3m during the first nine months of this year, according to today’s update. The number of active customers rose by 12% to 131,346, while average revenue per user increased by 2% to $1,799.

Looking more closely at the third quarter, profitability seems to have improved. Plus500’s EBITDA margin rose from 37% during the first half to 43% during the third quarter. Two key metrics that influence profitability both improved during the period. The average user acquisition cost fell from $1,347 in Q2 to $1,300 in Q3, while the average revenue per user rose from $1,037 to $1,107.

Having invested in marketing and attracted a significant number of new users so far this year, Plus500 now intends to focus on maximising profitability. Full-year results are expected to be in line with expectations, which give a forecast P/E of 9 and a prospective yield of 7.8%.

Plus500’s founder shareholders sold £100m of stock in September, which gave the share price a knock. However, this firm has a proven track record of cash generation. The dividend should be safe this year.  I’m tempted to say the shares are a buy at current levels.

Crash landing?

Shareholders in Cobham might be feeling frustrated this morning. Their company has issued another profit warning, despite a £491m rights issue just four months ago.

Cobham says that its satellite communications and wireless business units have underperformed, with growth coming at a slower pace than expected. Fourth quarter trading is expected to improve, but full-year trading profit is now expected to be £255m-£275m. That’s about 20% below last year’s figure of £332m.

A bigger worry could be that despite the cash from the rights issue, Cobham’s debts are still high. Today’s update indicates that net debt/EBITDA ratio is expected to rise to 2.6 times by the end of the year. That’s quite high, although it’s still below the limit of 3.5 times imposed by the group’s lenders.

In my opinion, one of Cobham’s problems is that it has committed to paying out £126m in dividends this year. I believe this cash should have been spent on reducing debt.

Cobham’s new chief executive, David Lockwood, starts work on 1 January. I expect Mr Lockwood to deliver a further round of bad news soon after he starts and I think the dividend may be cut in order to speed up debt reduction. There’s also a risk that trading will continue to disappoint during Q4.

A better recovery buy?

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.