This FTSE 250 stock just crashed 20%. Here’s what I’d do now

G A Chester weighs up the investment prospects of today’s big FTSE 250 (INDEXFTSE:MCX) faller and another mid-cap stock.

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I’ve written bullishly this year about travel operator FirstGroup (LSE: FGP). Most recently, I explained why “I’m convinced management is pursuing a strategy that will ultimately unlock value for investors.” The share price was 129p at the time, and I said I was looking forward to the company’s half-year results on 14 November.

On the back of those results, the shares have crashed 20% to 103p, as I’m writing. In this article, I’ll look at the latest news and tell you what I’d do now.

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I’ll also look at security firm G4S (LSE: GFS) — a fellow FTSE 250 stock I’ve bigged up on the same grounds as First — but whose trading update last week was greeted more warmly by the market, the shares moving up 3% on the day.

Delivering value

When companies separate their businesses — for example, by a demerger — they very often deliver value for shareholders. Re-energised and more focused, the performances of the separated businesses often become stronger (and their market valuations higher) than when they were yoked together.

G4S and FirstGroup are both pursuing demerger strategies. G4S is planning to demerge its Cash Solutions business, leaving it focused on its Secure Solutions division.

FirstGroup’s plans are more complex. A demerger looks on the cards for its UK First Bus division, and possibly a separation of First Rail. Meanwhile, in the US, a formal sale process is under way for its iconic Greyhound business. This would leave the group focused on North American contract-based operations, First Student and First Transit.

All going to plan

G4S’s two businesses are performing well, and its plans for demerging Cash Solutions are well advanced. It said in last week’s Q3 trading update: “The group sustained the positive organic growth momentum we saw in the first half, with organic revenue growth of 4.3%.”

Management said it expects continued momentum in Q4, and sees “good opportunities to generate further revenue growth next year and beyond.”

The company also confirmed good progress on preparations for the demerger of Cash Solutions in the first half of next year, as well as evaluating “unsolicited third-party proposals which may provide an alternative to the demerger.”

At a share price of 205p, G4S trades at 11.2 times this year’s forecast earnings. I remain confident the demerger (or potential sale at a premium price) of Cash Solutions will provide a good valuation uplift in due course. As such, I continue to rate the stock a ‘buy’.

Overdone

FirstGroup today reported a first-half statutory pre-tax loss of £187m. However, it included a non-cash impairment charge of £124m on the carrying value of Greyhound, and a £59m insurance reserve charge, due to a deterioration in the US motor claims environment leading to increased insurance costs.

More positively, group revenue increased 6.9% (4.1% at constant currency), and “all divisions delivered growth after excluding disposals and withdrawals from loss-making routes.” Management added: “We are confident in delivering our trading expectations for the full year.”

The company also said it’s progressing through the detailed work to prepare for the separation and rationalisation of its businesses, and that the formal sale process for Greyhound “is now well advanced”.

I think today’s share-price crash is way overdone, and with the stock trading at little more than seven times this year’s forecast earnings, I reckon this represents a great opportunity to buy.

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G A Chester 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.

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