Should I bet on these 2 value stocks for 2018?

These two value stocks look cheap, but is it worth buying them in 2018?

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At first glance, Mission Marketing (LSE: TMMG) looks to be one of the cheapest stocks around. At the time of writing, the shares are trading at a forward P/E of only 5.8 and support a dividend yield of 4%. 

Unlike other companies that usually fall into this valuation, Mission isn’t struggling to grow either. Over the past six years, earnings per share have grown at a steady rate of 5% per annum and net profit has increased at a rate of 7.5%. 

And today, the company announced that it expects to report further growth for 2017. Management expects revenue to be “6% ahead of last year, reflecting like-for-like growth of almost 4%.” Meanwhile, headline profit before tax “is expected to be 10% higher, at £7.7m, representing the seventh consecutive year of growth.

Avoiding the business

Despite Mission’s low valuation and steady growth, there are some issues with the business. For a start, the balance sheet is weak. Intangible assets accounted for around two-thirds of the £134m in total assets booked on the balance sheet at the end of the first half. Excluding these intangibles, total shareholder equity is negative £7m. The group also has a reputation for being heavily leveraged. Net debt was £9.4m at the half-year compared to net fixed assets of £3.8m. What’s more, cash flows tend to be weighted to the second half of the year, which means that there’s a lot of uncertainty surrounding the company. 

Still, management is trying to change investors’ perception of the business. Today’s update notes that thanks to an “exceptional year for working capital reductions,” net debt ended the year at £7.5m, reducing the net debt-to-EBITDA ratio below one “thereby triggering a 0.5% reduction in interest rates on the group’s debt facilities.” Moreover, the management announced last year that it was planning to improve its operating margins from 11.5% to 14% by March 2020, which should unlock additional cash to improve the balance sheet. 

So overall, Mission is heading in the right direction, and as the valuation already reflects the worst-case scenario, I believe that there could be considerable upside for the shares if management manages to change investor perceptions. 

As well as Mission, airline Flybe (LSE: FLYB) is another value stock I believe you should consider in 2018. 

Long-awaited turnaround 

Over the past few years, it has been undergoing a transformation plan. The previous management had presided over a sad period for the group as over-expansion inflicted heavy losses. Flybe’s new chapter revolves around being the best it can be by providing services only on the routes where there is suitable demand.

The good news is that on more than two-thirds of the company’s routes, it has no competition, so unlike other carries, it does not have to worry about price wars. These domestic routes are seeing rising demand as train fares increase, and it becomes cheaper and faster to fly across the country rather than go by rail. 

Unfortunately, it has been a consistent under-performer in recent years. The firm’s recovery was supposed to get under way this year, but an IT upgrade has resulted in further delays. 

Still, when the airline finally takes off, the gains could be huge. Thanks to the market’s downbeat view, the shares are trading at a price-to-book ratio of only 0.5. 

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.

Rupert Hargreaves owns shares in Mission Marketing Group and Flybe Group. 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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