The Motley Fool

Is it time to buy the Kier share price and this other big faller?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Traffic Sign for U-turn
Image source: Getty Images

The Kier (LSE: KIE) and Purplebricks (LSE: PURP) share prices are trading well below their 52-week highs, down 82% and 38%, respectively. However, both have enjoyed a bit of a post-election bounce. Could this be the start of a major revival, with a big upside for buyers today?

Tacit admission

Last week’s half-year results from Purplebricks did nothing to dispel my belief its no-sale-still-pay business model is deeply flawed. I’ve long been convinced its rising marketing spend to persuade new punters to take a gamble is unsustainable. And that negative word-of-mouth from sellers who handed over cash for no result would ultimately undermine the business.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

In the six months ended 31 October, Purplebricks reduced its UK marketing spend to £12.3m from a record high of £13.5m in the same period last year. UK instructions and revenue both fell, the latter to £47.1m from £48.4m.

Purplebricks announced it’ll be field-testing different pricing methods in early 2020, “with some reducing the level of up-front fee and splitting the payment between publication and completion.” I view this as a tacit admission the existing business model is broken.

Its newer business in Canada managed to increase revenue to £17.7m from £15.2m, but this came with a marketing spend ramped up to £4.2m from £3.2m. I can only see Canada following the same trajectory as Purplebricks UK in due course.

Unconvinced

At a share price of 117.4p, the group is valued at £360m. This is almost three times a City consensus revenue forecast of £121m on which a £6.4m pre-tax loss is expected. I think the valuation is far too high for a business I’m wholly unconvinced is capable of generating profitable growth. As such, I’m happy to avoid the stock until I see evidence to the contrary.

Dirt cheap

Kier’s valuation is a huge contrast to that of Purplebricks. With a share price of 96p, and market capitalisation of £156m, it’s valued at just 0.04 times City analysts’ forecast revenue of £4,268m. Furthermore, unlike the unprofitable property-listing agent, Kier is forecast to post a pre-tax profit of £89m and positive earnings per share of 44p, giving it a price-to-earnings ratio of 2.2.

On the face of it, Kier is dirt cheap. Unfortunately, successful investing isn’t quite as straightforward as simply buying stocks trading at the lowest revenue and earnings multiples. Indeed, when they’re as low as Kier’s 0.04 times revenue and 2.2 times earnings, our first response should not be to hit the buy button, but question why the valuation is so low.

Close watch

Kier also has a debt problem. Year-end net debt at 30 June was £167m, with average month-end net debt of £422m. It also has substantial off-balance sheet debt. Management is doing what all companies do when severely constrained by debt. Namely, cutting costs and trying to raise cash by selling some of its assets.

In this kind of situation, if you simply believed every management team that said it was confident about its turnaround strategy, you’d end up investing in wipe-outs like Carillion and Thomas Cook. I’d want to see tangible evidence of falling debt and improving business performance before getting involved with Kier. As such, I’d avoid the stock for the time being, but keep a close watch on developments in 2020.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.