I named outsourcer Mitie (LSE: MTO) as ‘The one FTSE 250 stock I’d sell ASAP’ back in May. I showed, among other things, how the company’s accrued income (income booked in the accounts but not yet received) had been rising dramatically over the years, well ahead of its peers and in a sector not renowned for conservative revenue recognition.
Its longstanding chief executive and finance director had both departed and I expected major kitchen-sinking from the new chief executive in the form of impairments, a suspension of the dividend and a discounted fundraising at some point to shore up the balance sheet. In short, a pretty grim outlook for the company whose shares were then trading at 221p.
Up and down
To my consternation, the shares began to soar. Full-year results in June saw the dividend suspended but impairments were far less than I was anticipating and net debt had fallen to £147m from £178m. The shares reached a high of almost 300p in the wake of the results. So much for my ‘sell’ rating at 221p!
However, while short-term traders may have profited, the shares soon began to fall back and after the company released its half-year results earlier this week, they’re down to 206p, as I’m writing. Net debt was back up, to £173m, and there’s also £60m debt due to be repaid in December. Nevertheless, the board declared a small interim dividend (gross cost £0.5m).
I continue to think we’ll see further impairments in due course, including to goodwill, of which there’s £274m on the balance sheet, compared with net assets of less than £100m. Goodwill of £107m was written down to zero for its disposed-of healthcare business and there’s been a £15m writedown on its held-for-sale property management arm. But no writedowns for continuing operations.
I also still feel a dilutive fundraising is likely at some point. If so, 12-month forward earnings-per-share (EPS) forecasts would have to be lowered, making a nonsense of a current price-to-earnings (P/E) ratio of 11. Personally, I continue to rate the stock a ‘sell’, although investors should also consider the bull case.
Turning point
In contrast, I’m convinced FTSE 100 pharma giant AstraZeneca (LSE: AZN) has a terrific outlook and I rate the stock — trading at under 5,000p, as I’m writing — a ‘buy’. This despite EPS having fallen a cumulative 40% since 2011 and a further 20% drop forecast by City analysts this year.
The company is weathering a period of patent expiries and generic competition but the fall in EPS is forecast to bottom out in 2018. The business has been restructured and reinvigorated and my confidence in the medium-to-long-term outlook for earnings growth is bolstered by Q3 results from the company earlier this month.
Of particular note, management advised that the impact from patent expiries is receding. Meanwhile, new drugs are coming through fast. There were seven regulatory approvals during the period and other positive developments in the late-stage pipeline. Further significant news flow is expected during 2018.
A P/E of 18 may not sound cheap but this will drop rapidly if, as I anticipate, the company meets forecasts of accelerating EPS growth of 15% in 2019 and 20% in 2020. With the board having also maintained the dividend through the doldrums, giving a nice running yield of 4.2% at current exchange rates, the shares look very buyable to me.
