2 FTSE 250 bargains for under £2

Bilaal Mohamed takes a look at two of the cheapest shares in the FTSE 250 (INDEXFTSE:MCX) and finds out whether they’re bargains, or cheap for a reason.

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Back in November I suggested that investors ignore the meaty-looking dividend on offer at Cobham (LSE: COB) after softer trading conditions in its wireless and satellite communications markets had forced management to issue its third profit warning in less than a year. But by ignoring Cobham have we missed out on that chunky 5% yield?

Profit warning

It seems not. The Dorset-based group has since issued two further profit warnings and decided to scrap the final dividend altogether. Things were already looking grim for the aerospace and defence group last year, but now things are even worse. Last month the company announced plans for another rights issue after it sank to a massive £848m loss for 2016.

This will be Cobham’s second £500m rights issue in less than a year, as the struggling business looks to pay down its massive debts, after management conceded that the group’s balance sheet is clearly not strong enough. Full-year results for 2016 revealed a slight dip in orders to £2.08bn, down from £2.15bn in 2015, with revenue 6% lower at £1.94bn, compared to £2.07bn a year earlier. Pre-tax profits collapsed by a massive 38% to £175.2m from £280.4m the previous year.

Half price bargain?

Now trading at 139p, the group’s share price has staged something of a recovery of late as investors feel relieved the company has avoided a sixth profit warning in 15 months. Less of a surprise is that management has stated that it will not be recommending a dividend for 2017.

Cobham has shed more than half its value since its share price peaked at 293p in 2015, and bargain hunters may be wondering whether this is the right time to pounce on the severely wounded business. The picture remains bleak, with our pals over in the City suggesting that earnings will shrink by a fifth by the end of the year, leaving the shares trading on a very demanding 20 times earnings for 2017.

I’d be inclined to stay away until the group’s new management has had some time to sort out the mess from the previous era.

Swing to profit

Another mid-cap firm trading at less than £2 per share is outsourcing group Serco (LSE: SRP). The last few years have been very challenging for the Hampshire-based public services specialist with numerous contract problems and high-profile scandals straining relations with the UK government, from which it derives half its income.

As with fellow mid-cap firm Cobham, Serco has issued numerous profit warnings in recent years, resulting in a monumental share price collapse from 553p to 114p in less than four years. The FTSE 250 firm finally managed to swing back into profit in 2016, after two years in the red, but saw its shares plunge after reporting a drop in trading profit with revenues continuing to decline.

Underlying earnings are forecast to shrink by 59% this year, and the shares look extremely overvalued at 43 times 2017 earnings. I can see a market correction looming.

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Bilaal Mohamed has no position in any shares 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.

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