Is IWG plc a buy after falling 30% today?

Roland Head explains what’s gone wrong at Regus owner IWG plc (LON:IWG).

| 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.

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.

Shares of serviced office group IWG (LSE: IWG) fell by more than 30% this morning after the group — previously known as Regus — issued a major profit warning.

A hoped-for improvement in sales during the third quarter hasn’t happened. As a result, the company says that full-year operating profit for 2017 is now expected to be “materially below market expectations and in a range of between £160m to £170m”.

Operating profit last year was £185m, so today’s news suggests this figure will fall by around 10% this year. That’s very disappointing, considering that the stock was priced for earnings per share growth of around 20% this year.

Have the shares fallen too far?

The group’s revenue fell by 0.4% during the first six months of 2017, excluding exchange rate effects. According to today’s update, the equivalent figure for the first nine months of the year is 1.9%. This suggests to me that the third quarter may have been pretty grim.

The company says that “weakness in London” and “disruption” as a result of natural disasters in overseas markets has hit the performance. But it stresses that if closed centres are excluded, sales rose by 4.4% during the third quarter, excluding exchange rate effects.

Indeed, the board remains “very positive about the opportunity” for the serviced office business. The company will continue to spend money opening new centres, in order to lay the foundations for future growth.

Is this an opportunity for buyers with long-term vision? I’m not convinced. Businesses of this type run a particular risk. They must commit to long leases on the buildings they operate, but their customers only have to commit to very short tenancies. So a shift in market conditions can result in lots of expensive empty buildings.

Even after today’s fall, I estimate that the stock trades on a 2017 forecast P/E of 16, with a likely yield of just 2.6%. That doesn’t seem cheap enough to me, given the risk of a further profit warning.

A stock I’d buy today

The outsourcing sector has been a pretty dangerous place to invest over the last year. But at least one company seems to have avoided the problems that have hit many of its rivals.

Engineering services group Babcock International Group (LSE: BAB) has lost nearly 20% of its market value of the last year. But the firm’s latest trading update confirmed that results for the current year are expected to be in line with market expectations. That means that earnings per share are expected to rise by 35% this year.

One reason for the group’s more robust performance may be its engineering specialism. Whereas much of the work carried out by other outsourcing firms involves low-paid work, Babcock staff provide skilled engineering services to clients including the Royal Navy. The company is also involved in the nuclear power sector.

It says that 89% of revenue is now confirmed for the year ending 31 March 2018. That ought to provide management with fairly good visibility of profits for this year. The shares now trade on a forecast P/E of 10, with a prospective yield of 3.6%.

If Babcock can maintain its current level of performance, I believe the shares should offer good value at current levels.

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 has no position in any of the 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.

More on Investing Articles

Investing Articles

Empty Stocks and Shares ISA? I’d snap up these 3 stocks to start with!

Sumayya Mansoor explains how she would start to build wealth from scratch with an empty Stocks and Shares ISA and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

7.7% yield and going cheap! Why is this unknown FTSE 250 stock flying?

It's no household name, but there's one FTSE 250 stock with a high dividend yield and booming profits that looks…

Read more »

Photo of a man going through financial problems
Investing Articles

I’d stop staring at the Nvidia share price and buy this FTSE 100 stock instead

This writer reckons there is a smarter way to invest in Nvidia today without taking on stock-specific risk. Here is…

Read more »

Young lady working from home office during coronavirus pandemic.
Top Stocks

5 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Young Asian man drinking coffee at home and looking at his phone
Dividend Shares

These 3 FTSE 250 stocks offer me the highest dividend yields, but should I buy?

Jon Smith considers FTSE 250 shares with a very high yield, but questions whether the income is going to be…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Is FTSE 100 takeover target DS Smith a great buy?

A mega-merger between FTSE 100 giants DS Smith and Mondi has the City abuzz. But is there any value in…

Read more »

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

The WPP share price dips as profits fall. Here’s why it could be a top dividend buy

I'm starting to think the WPP share price undervalues the stock, especially if the long-term dividend outlook comes good.

Read more »

Black father and two young daughters dancing at home
Investing Articles

A £3K investment buys me 632 shares in 2 stocks for a second income!

This Fool explains how a second income is possible through dividend-paying stocks and details two picks that could help her.

Read more »