There is nothing more alluring than a fallen share price when we believe the underlying business has potential to recover, thus taking the shares back up.
Right now, the shares of pharmaceutical firm BTG (LSE: BTG) and hire company Speedy Hire (LSE: SDY) languish well below previous highs, but for different reasons. With both reporting interim results today, now seems a good time to look more closely.
At first glance, the half-time figures from BTG do not seem too bad. Compared to a year ago, revenue is up 20%, underlying operating profit up 11%, adjusted earnings per share up 35% and the firm looks like it is turning profits into cash gains with a 50% increase of cash sitting on the balance sheet, some £110 million or so now.
BTG looks and walks like a growth company, but the shares are down more than 5% on this news. The firm told us in advance that these results would likely fall to the lower end of previous guidance, so there are no surprises today. My guess is that current share-price weakness is more of a ‘technical’ factor playing out on the share price chart.
Varithena could still fly
When BTG’s share price flirted with levels in excess of 800p at the beginning of the year, there was a lot of expectation built in to the firm’s valuation about a new treatment for varicose veins called Varithena. In the event, rollout of Varithena in North America is taking longer than the firm anticipated. The issue seems to revolve around insurance coverage rather than the product’s appeal to prescribing physicians — if those doctors cannot get paid, they are not going to use the treatment.
However, in today’s update the company says Varithena was approved by Health Canada, and there is steady progress gaining insurance coverage and establishing appropriate payment levels in the US reimbursed sector. We seem very far from ‘game over’ with Varithena, I would say, and the firm’s other treatments continue to perform well.
BTG remains a highly rated company, but not as high as it was. At today’s share price of 517p, the forward price-to earnings (P/E) ratio runs at about 20 for year to March 2017. I think City analysts following the firm expect Varithena to contribute to earnings that year because they pencil in a 51% uplift. If they are right, BTG is starting to look like good value for a quality growth operation. Meanwhile, a glance at the share price chart tells us that the shares were ‘always’ going to hit levels around the 500p mark during the current bout of pessimism. There is strong support at that level. That is the ‘technical’ factor I mentioned.
A turnaround proposition
The story at Speedy Hire is quite different; the shares collapsed because profits collapsed. Today’s 31p share price remains around 61% below the highs achieved at the beginning of the year.
Speedy Hire is a cyclical firm and business ebbs and flows according to the fortunes of the industries the firm serves. I would expect trading to be robust in this mature stage of the current macro-economic cycle, so the company’s problems seem to be internal. As such, Speedy Hire today is a turnaround proposition more than anything else, I would argue.
In today’s report, the chief executive identifies several reasons for the firm’s profit dive and revenue decline: a lack of focus on small and medium enterprise (SME) customers; poor execution of a number of business improvement programmes, including the implementation of a new IT and management information system, resulting in the unavailability of key products in many depots; and a lack of ownership, empowerment and accountability within the business.
Back to basics
In other words, Speedy Hire was getting the basics of its business wrong. That suggests that the firm can do much, relatively quickly, to put its house in order. After all, identifying the problems is half way to fixing them. Naturally, the directors have a plan, and I would be surprised if its execution does not result in share price uplift from here. Indeed, the shares are up almost 9% on the day as I write.