The value stock set to beat the Footsie despite profit warning sending shares 10% lower

This company could have a bright future even though it is among today’s biggest fallers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buying shares in a company that has just released a profit warning is risky. After all, there is always a good reason behind a profit warning, and the issues which caused it could continue. As such, there is a good chance of paper losses in the short term, and even larger losses in the long run. However, such opportunities can also lead to high returns, too. A company that fell 10% on Monday morning after a profit warning could fall into the latter category, and may be worth buying for the long run.

A difficult year

The company in question is Bovis Homes (LSE: BVS). The housebuilder has reported a disappointing set of results for 2016 which show that its strategy has not performed well. It has led to a fall in pretax profit of 3% and, perhaps more worryingly, a high level of customer service issues. In fact, such is the gravity of the situation that Bovis has set aside £7m in customer care costs as it seeks to satisfy customers who are unhappy with the houses they have purchased.

The company will also seek to improve its production process and will conduct a strategic and structural review to ensure it delivers the highest possible returns from its land assets. Therefore, there does not seem to be a quick fix, and the outlook for 2017 has been negatively affected. Bovis now expects 2017’s performance to be lower than previous guidance, which realistically means a further fall in earnings in the current year. This could cause investor sentiment to come under pressure beyond today.

Low valuation

Even though Bovis could endure a difficult year, its valuation may now take this into account. In the last five years its price-to-earnings (P/E) ratio has averaged 13.5. Today, its P/E ratio stands at just 8.4. Even if its bottom line falls in 2017 and 2018, there seems to be scope for a major upward rerating over the medium term. And since Bovis trades on a price-to-book (P/B) ratio of just 1, now could be the right time to buy it.

A better buy?

Despite this, its valuation is higher than that of sector peer Berkeley Group (LSE: BKG). It trades on a P/E ratio of 7.1, but is due to report major falls in its bottom line over the next two years. In fact, using its forecast earnings for 2019 puts Berkeley on a P/E ratio of 9.1. This indicates that the company remains a sound investment for the long term, especially since weak sterling may entice foreign buyers to the London property market. And since Brexit negotiations will be completed in around two years’ time, the outlook for prime UK property may become more favourable.

However, given its lower valuation and potential for a turnaround, Bovis seems to be the better buy at the present time in my opinion. Its shares may fall further in the short run, but they could beat the FTSE 100 between now and the end of 2018.

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.

Peter Stephens owns shares of Bovis Homes Group. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

I remain bullish on Nvidia stock despite its overvaluation

Our author says Nvidia stock is overvalued right now. However, he still thinks it might be worth him buying because…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d take the Warren Buffett approach to building a passive income empire

Christopher Ruane explains how he'd try to earn passive income streams from the stock market by learning from billionaire investor…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

2 of my most amazing buys from the FTSE 100 for passive income

The FTSE 100's home to a number of exceptional shares offering the prospect of handsome income. Here are two to…

Read more »

Investing Articles

1 AI stock to buy and hold for 10 years

AI spending's expected to soar in the next decade, according to most experts. Here's one stock to consider buying to…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Dividend deals! 2 passive income stocks that still look undervalued

Royston Wild explains why these FTSE 250 passive income stocks might STILL be too cheap to miss, despite theirrecent price…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Is BT Group one of the FTSE 100’s greatest value shares?

BT's share price looks like a bargain when you look at the P/E ratio and dividend yield. Is it one…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

The National Grid share price just plunged another 10%. Time to buy?

The National Grid share price is one of the FTSE 100's most stable, and nothing much happens to it? Well,…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 15% in 3 months, but I still won’t touch Vodafone shares with a bargepole

Harvey Jones has been shunning Vodafone shares for years. The FTSE 100 stock is finally showing signs of life, but…

Read more »