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Why I’d buy this hot growth stock over Provident Financial plc

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Trying to catch falling knives is a risky sport. Even though you can make an impressive return if you pick the right stock, more often than not the turnaround story flames out, and you end up burning your fingers. As Warren Buffett once said, “turnarounds seldom turn.

After a disastrous decision to try and turn its part-time employees into full-time workers, Provident Financial (LSE: PFG). Fell into the turnaround bucket. By changing its employment structure, management was trying to cut costs, but this has failed spectacularly.

Following the changes, employees fled the doorstep lender and losses started to pile up. Only 57% of the firm’s outstanding debts were collected in August (a figure that’s since recovered to 65%) and overall this year, management is projecting losses from debt write-offs of £120m. 

Time to catch the knife?

Even though some analysts are positive about the outlook for Provident, including my Foolish colleague Peter Stephens, I’m not so sure. You see, the company’s problems have resulted in its best agents, which have the best customers, moving to rivals, taking business with them, and it’s going to be hard to win back these customers

Even though City analysts are predicting a recovery in the company’s earnings next year (up 64% to 91p), they’re still projected to come in at around half the level reported for 2016 (178p). Analysts are also predicting a dividend of 31p per share, down around 77% since 2016. 

A better buy 

As Provident struggles, I prefer the look of Polypipe (LSE: PLP). Unlike the doorstep lender, this one is still growing strongly in a defensive industry. Indeed, today the company announced that it is on track to meet full-year guidance after a “strong” performance in the first 10 months of the year. For period ended October 31, revenue expanded 8.1% to £400.6m. On a like-for-like basis, revenue grew 7.1%. Revenue growth was driven by robust UK Residential Systems growth of 9.9% to £193m. 

In mainland Europe, revenue for the period expanded 19.9% or 11.2% on a like-for-like basis. CEO Martin Payne said: “The group continues to deliver strong organic growth ahead of the overall UK construction market, demonstrating the resilience of its balanced exposure to the different sectors within that market, and the continued success of its strategic growth pillars of legacy material substitution and legislative tailwinds in water management and carbon efficiency.”

For the full-year, City analysts expect the company to produce earnings per share growth of 7%, followed by an increase of 8% for 2018. If the company hits these targets, it will have grown earnings per share three-fold in six years. And growth should accelerate in the years ahead as the company pays down its debt, which is currently equal to 2 times EBITDA. Debt is projected to reduce significantly during the second half due to the timing of cash flows. 

As well as paying down debt, management is returning cash to shareholders. The stock currently yields 2.8% and trades at a forward P/E of 14.7. 

So overall, if you’re looking for an income and growth buy, with the potential for further growth as its balance sheet improves, I believe Polypipe could be a great buy. 

The best buy out there?

As well as Polypipe, there's another company out there that looks to me to be a top buy for small-cap income and growth investors. 

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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.