One of the biggest problems with turnaround stocks is that they usually take time to recover. And in the period of recovery, there is uncertainty and sometimes disappointment which can lead to a falling share price. However, in the long run such stocks can deliver high share price returns.
With that in mind, the fall in the Talktalk (LSE: TALK) share price on Wednesday of 15% may seem like a disaster for its investors. After all, it is a sizeable loss in a short space of time. However, in the long run the company appears to have recovery potential. With its shares now cheaper than they were, it could be an even more enticing buying opportunity.
Growth potential
In recent months, Talktalk has prioritised growth. The company reset its strategy in May and since then its focus has been on adding new customers and simplifying the business. In this aim, its first half of the year seems to have been successful. It was able to add 46,000 new customers during the period versus a fall in the same period of last year of 29,000.
Its Retail and Wholesale divisions both saw double-digit growth, while the company continues to make progress on churn rates. They are down to 1.3% from 1.5% in the second half of last year. This shows that customer satisfaction and the company’s competitiveness may be improving versus sector peers. The business was also able to post strong growth in fibre, where customer numbers increased by 161,000, and in TV, where customer numbers increased by 19,000. Against a competitive market backdrop, the growth prospects for the business seem to be bright.
Financial outlook
Of course, Talktalk’s focus on growth has meant that its financial performance has disappointed. It recorded a loss in the first half of the year of £75m on a pre-tax basis. This compares to a pre-tax profit of £30m in the first half of the prior year. In addition, dividends have fallen to 2.5p per share from 5.29p per share over the same period. This is disappointing, but unsurprising given the level of investment which may be required to turn the company’s performance around.
In 2018, earnings are due to rise by 26%. This could help to improve investor sentiment over the medium term – especially since Talktalk trades on a price-to-earnings growth (PEG) ratio of just 0.6 at the present time. This indicates that it may offer a wide margin of safety, and that share price growth prospects may be high.
As such, while its investment performance may be volatile and its financial outlook may be uncertain due to the changes it is making to its business, the stock seems to be a sound turnaround opportunity. It could offer excellent value for money at a time when a number of mid and large-cap shares are starting to look relatively expensive.
