Is the Interserve share price the bargain of the year?

Could Interserve plc (LON: IRV) deliver high returns due to its low valuation?

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While the stock market continues to trade at relatively high levels, a number of stocks still offer extremely low valuations. This could be because they are unpopular among investors, or are expected to face difficult futures. Either way, there could be opportunities on offer for value investors.

One example of a cheap stock at the present time is support services and construction company Interserve (LSE: IRV). It has faced a difficult recent past, with its profitability coming under severe pressure. After a fall in its valuation of 63% in the last year, could it now represent the bargain of 2018?

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Challenging outlook

While Interserve is expected to report its second consecutive year of profit declines for 2017, things could go from bad to worse. Amidst difficult trading conditions, the company is forecast to post a fall in its bottom line of 39% in the 2018 financial year. This could hurt investor confidence – especially since its earnings forecasts have been downgraded in recent months.

Looking ahead, trading conditions within the UK outsourcing and construction space are expected to remain tough. This could lead to a further downgrade in the company’s financial outlook and cause its share price to come under additional pressure.

Turnaround prospects

Despite the risks that Interserve faces, it is still expected to deliver a successful turnaround. In the 2019 financial year its bottom line is forecast to rise by 12%, which could have a positive impact on its valuation. And since it trades on a price-to-earnings (P/E) ratio of around 4.5, it appears to offer a wide margin of safety at the present time.

Certainly, there are less risky investments available right now and the prospects for the company are difficult to predict. However, with such a low valuation and the expectation of a turnaround as the company delivers on its efficiency programme, it could prove to be a worthwhile buy for less risk-averse investors.

Improving performance

One company operating in a similar space to Interserve which has been able to deliver significantly improved performance is Balfour Beatty (LSE: BBY). It reported a number of profit warnings and has experienced difficulties with legacy issues. However, it has moved from loss to profit and is now expected to report bottom line growth of 28% in the next financial year.

This has the potential to catalyse investor sentiment and send the company’s share price higher after what has been a challenging three months for investors. The company’s shares have moved 10% lower and this means that they now trade on a price-to-earnings growth (PEG) ratio of just 0.4, which suggests that they could deliver improving levels of capital return.

Since Balfour Beatty has international exposure, it may be able to offer improving financial performance even if the UK economy’s prospects are downgraded. While risky and still not fully recovered after a difficult past, the stock appears to offer a favourable risk/reward ratio.

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