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Why I’m avoiding this high-yielding stock right now

Public Domain.

Another day, another profit warning from troubled outsourcing firm Mitie Group (LSE: MTO), or it certainly seemed like that earlier this week when the company issued its third profit warning within the space of just four months. It goes without saying that the share price has taken a battering over the past year, shedding around a quarter of its value and making it one of the worst performers of the FTSE 250 index. With the shares at their current depressed levels could it possibly be time to pick up a bargain?

Brexit uncertainties

It seems that the old adage that profit warnings come in threes certainly rang true for the Bristol-based firm. Back in September it issued a trading update highlighting the fact that it had secured some important new contracts in its core Facilities Management business, where its long-term strategic positioning, order book and pipeline remained strong.

But at the same time, the company admitted that it continued to experience the effects of significant economic pressures, including lower UK growth rates, changes to labour legislation and further public sector budget constraints. And of course, the uncertainties around Brexit made their mark too. Management tried to reassure investors, saying it was taking strong action to counter the impact of these pressures by making operational changes and initiating cost efficiency programmes across the whole group.

Sell-off

The company also warned that full-year operating profits would now be materially lower than previously expected. That was a consequence of the continuing pressures experienced in the first half, and further one-off costs of organisational change associated with its cost efficiency programmes, totalling around £10m. But of course this wasn’t enough to stop investors panicking with the share price taking a hammering from the resulting sell-off. City analysts began to slash their earnings forecasts and a week later Mite had lost a third of its market value.

Investors who held their shares were perhaps hoping for more upbeat news in the company’s interim results in November, but unfortunately they were in for a disappointment as another profit warning hit the headlines. Operating profit fell by a massive 39.1% to just £35.4m, and the company saw a pre-tax loss of £100.4m, as it reiterated that full-year results would still fall short of expectations.

Third time unlucky

Earlier this week Mitie warned for a third time that earnings would be below forecasts as it struggled with client deferrals, delayed investment plans and an underperforming cleaning division. It now expects underlying operating profits for the full year to 31 March to be between £60m and £70m, again lower than previous forecasts.

Analysts expect a 30% fall in underlying profits for the full year, leaving the shares trading on a modest P/E rating of 12. Less risk-averse investors might see this as a potential recovery play, but I would suggest that those who want to sleep peacefully at night should wait for the outlook to improve. Existing shareholders might want to sit tight however, as the prospective 4.2% dividend yield is covered twice by earnings and should help to ease some of the pain.

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Bilaal Mohamed 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.