Today I’m looking at two high-profile turnaround stocks from the FTSE 250. Both have suffered problems over the last year, but I believe these should be fixable.
Does either stock deserve a buy rating, or is a recovery already priced into the shares?
H1 sales beat forecasts
FTSE 250 outsourcing firm Mitie Group (LSE: MTO) slumped to a £184m loss last year. But acting chief executive Peter Dickinson appears to be making progress with the group’s turnaround.
In a trading statement this morning, the company said that half-year revenue is expected to be £1.1bn. This is “better than anticipated” and is 4% higher than for the same period last year.
Management’s plan is to automate or outsource many administrative and IT functions. London offices are also being consolidated from three into one. These measures are expected to result in cost savings of £40m a year by 2020.
This complex transformation programme is going well, but is costing more than anticipated. Transformation costs are now expected to total £24m this year, a lot more than the previous estimate of £15m.
Trading outlook
Mitie’s order book rose by 3% to £6.7bn during the first half. However, some of the firm’s new contract wins were offset by the unexpected loss of a “top 20 contract” which was not due to expire until 2019. No explanation of this was provided but the company says it will result in a £6m non-cash write-off.
The overall picture appears reasonably positive, as Mitie does seem to be gradually leaving its problems behind. The company’s share price hasn’t moved following today’s statement, which suggests that City investors believe Mitie is still on track to deliver results in line with market forecasts this year.
On this basis, the stock trades on a forecast P/E of 15, with a prospective yield of 1.9%. I’m not sure it is a compelling buy, but I would hold at current levels.
The tide could soon turn
Shares of bus and train operator Go-Ahead Group (LSE: GOG) have fallen by 27% so far this year. The group recently reported a 10% fall in earnings and warned that the profitability of its rail business was likely to fall during the current year. These results received a poor reception and the stock is currently trading at its lowest levels since 2013.
There’s no doubt that Go-Ahead’s performance has been disappointing. But the firm’s profits only fell by 10% last year. By contrast, the group’s shares have fallen by 20% over the last 12 months. I think there’s a possibility that the stock is now trading in value territory, and could be a contrarian buy.
Consensus forecasts suggest that the group’s earnings will fall by around 7% this year and in 2018/19. This has left the stock trading on a forecast P/E of about 9, with a prospective dividend yield of 6.3%.
Net debt remains reasonable relative to earnings and the dividend is still comfortably covered by earnings.
The big risk is that the group’s profits may yet fall further than expected. Although I’d rate the stock as a potential turnaround buy, investors looking for a big win may need to be patient.
