Can Shoe Zone PLC, Fenner plc And Game Digital PLC Bounce Back In 2016?

Shoe Zone PLC (LON:SHOE), Fenner plc (LON:FENR) and Game Digital PLC (LON:GMD) have all seen heavy trading following market updates.

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In today’s article I’ll look at three firms that issued trading updates today. Are these battered stocks likely to bounce back and hit new highs in 2016?

Fenner

Shares in engineering firm Fenner (LSE: FENR) touched a new low of 119p this morning after the group issued a profit warning. The mining and oil slump means that many of Fenner’s customers are spending much less than they used to. Exchange rate differences are also putting pressure on profits.

Fenner also plans to scale back its ECS division, which makes conveyor belts of the type used in coal mines. By closing one of the division’s two US factories and making widespread cutbacks, Fenner expects profits at its ECS Americas operation to “start to return towards historic levels” in 2016/17.

At around 125p, I don’t think Fenner looks especially expensive. Before today’s profit warning, the stock traded on about 12 times 2015/16 forecast earnings and 11 times 2016/17 forecasts.

These metrics will now worsen, but the firm looks very cheap relative to its historic performance. I intend to continue holding my shares and expect a medium-term recovery.

Game Digital

Game Digital (LSE: GMD) shares fell by 50% before Christmas when the firm issued its second profit warning in less than a year. The group’s management is now trying to redeem itself and the stock rose by 5% today after the company issued a Christmas trading update.

The group, which has stores in the UK and Spain, said that trading improved in the Christmas period. While total sales fell by 5.5% during the first half of its financial year, they only fell by 0.4% during the 3 week period from 20 December to 9 January.

Game left earnings guidance unchanged today and said that the board was confident in the prospects for second-half trading.

The group’s shares currently offer an eye-opening yield of 13%, thanks to their pre-Christmas collapse. However, the 13.8p forecast payout is not covered by forecast earnings per share of 9.05p for 2015/16, and I suspect that a dividend cut is quite likely.

Indeed, the firm’s poor record since its flotation suggests to me that it was dressed to impress by its former private equity owners but may lack substance. I wouldn’t buy these shares.

Shoe Zone

Budget shoe retailer Shoe Zone (LSE: SHOE) jumped 12% in early trading today after issuing final results in line with market expectations. Today’s gains recoup the losses seen earlier this week but still leave the share price nearly 10% lower than before Christmas.

One reason for today’s gains is that Shoe Zone has announced a special dividend of 6p in addition to the planned ordinary payout of 6.5p. The total payout of 12.5p gives a tasty yield of 6.9% at the current share price.

Shoe Zone has net cash and reported a 6.2% operating margin today, so its profitability and financial strength don’t concern me. What is a worry is that the group appears to be struggling to generate any growth. Less profitable stores have been trimmed but these lost sales have not yet been replaced by new stores or online sales.

The company expects to make progress in this area this year, but I believe this is a key risk with Shoe Zone.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Fenner. 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.

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