One FTSE 250 bargain I’d sell and one I’d consider buying today

Harvey Jones thinks investors should stand clear of this stock after a 13% crash, but warmly admires another.

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Scottish multinational transport specialists FirstGroup (LSE: FGP) crashed 13% today as chief executive Tim O’Toole stepped down after reporting hefty impairments across two of its businesses. So how bad is the damage and could now be the time to hop on board?

Missed the bus

FirstGroup posted a statutory £326.9 loss before tax, against profit of £152.6m last year. This principally reflected goodwill impairments and other asset charges totalling £277.3m at its Greyhound operation, partly blamed on severe weather and driver shortages, although the biggest problem was structural. Like-for-like revenue growth of 0.7% “was insufficient to offset long-haul demand challenges from intensifying airline competition” as budget operators significantly increased capacity and extended into new markets.

The group was further hit by an onerous contract provision on its TransPennine Express (TPE) rail franchise, which booked a £106.3m loss, and many blame FirstGroup management’s excessively optimistic assumptions when it initially bid for the contract. Statutory revenues did rise 13.2% to £6.4bn, but the positives were swamped by the negative numbers.

Greyhound bites

Chief financial officer and interim chief operating officer Matthew Gregory said forward group adjusted earnings should be broadly stable, with opportunities to improve the margins, returns and cash generated from its road divisions (which together represent more than four fifths of the group’s adjusted profit), while its rail portfolio should also make a positive contribution.

However, my Foolish colleague Royston Wild saw today’s skid coming, previously warning that its UK and US bus operations face colossal struggles, which are reflected in its lowly current forward valuation of 8.6 times earnings. The group recently rejected what it called an “opportunistic offer” from private equity company Apollo Management, but such high-mindedness does not sit well today. The challenge from budget airlines is not going to disappear. Yes, the valuation looks low, but there is a good reason for that. I think I’ll wait for the next bus.

Plastic people

RPC Group (LSE: RPC) has also given investors a bumpy ride lately, its share price down 15% in the last six months. It specialises in rigid plastics packaging which is now threatened by the war on the growing tide of waste clogging up the planet.

The threat overshadowed a strong Q3 for the FTSE 250 group, which posted a 31% rise in year-on-year revenues to £898m, boosted by acquisitions and organic growth. Management also said it was working with governments to reduce plastic waste and noted that many of its products are already recyclable.

Easy as RPC

My Foolish colleague Alan Oscroft is a fan of the £3.23bn group, noting that RPC has increased its dividend for each of the last 25 years. It currently offers a forecast yield of 3.8%, covered 2.5 times, with operating margins of 10.7%.

Its growth outlook seems solid, with earnings per share forecast to increase 8% in the year to 31 March 2019, and 6% the year after. By then, the yield could be 4.1%. It has also gifted shareholders £100m in its buyback programme over the last year. Despite this, it trades at just 10.3 times earnings. RPC appears to have it wrapped.

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 considered so you should consider taking independent financial advice.

harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended RPC Group. 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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