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This FTSE 250 stock has exploded this year! Can it continue?

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The Reach (LSE: RCH) share price has been on a tear this year. Since the start of 2021 the share price had rallied 132%, more than every other stock in the FTSE 250. It’s also up almost as much year-on-year.

However, the shares of this national and regional news publisher have fallen by over 20% since August. Is this recent dip just a case of profit taking? And should I consider buying the shares for my portfolio?

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Crash and return

It hasn’t all been plain sailing for Reach in recent times. In fact, the shares crashed hard in 2020, from near 180p, all the way back down to under 50p, making it a penny share. But after a stellar run, the share price is currently over 300p – a whopping 500% return since that low point!

So, what’s gone right for Reach?

Reach’s turnaround story

Reach is an interesting turnaround story. Traditionally a print newspaper business, the company recognised the need to pivot as the industry is in structural decline.

However, it owns a lot of online assets, and has shifted the business to growing its digital advertising revenue. Its websites include nine national titles (including the Express and the Mirror), and more than 110 regional ones.

Reach says that 48m people a month visit its websites for news, entertainment and sport in the UK. What’s more, in the last annual report for 2020, it only ranked behind the Big Tech names – Google, Microsoft, Facebook (now Meta) and Amazon – in terms of monthly unique visitors to its online estate.

Management

The company has a fairly new management team on board too. The current CEO, Jim Mullen, took the helm in 2019 after his previous role of Chief Executive at Ladbroke Coral. Mullen has further experience as a Director of Digital Strategy at News International, so is well equipped to take the CEO role at Reach.

In the same year as Mullen joined, a Chief Financial Officer and Non-Executive Director with experience at the BBC and Channel 4 both joined the company. I think this shows the digital transformation strategy is well under way.

Valuation risk

Now that the shares have fallen 20% recently, is it the right time to buy?

Interim results to the end of June showed revenue growth of 4%. Digital revenue increased 42.7%, but print declined 5.2%. This is to be expected and shows the turnaround strategy in progress. Earnings rose 27% to 17.8p per share, and trading is ahead of full-year expectations so far.

On a price-to-earnings (P/E) ratio, the shares are valued at nine times earnings for this year, which looks cheap.

But it’s the debt I’m cautious over, specifically the large pension deficit. Net profit in its recent half-year results was £28.6m, but a huge £37.1m in cash was paid out as contributions to its defined benefit pension schemes.

In fact, on a debt-adjusted P/E ratio, the shares are valued on a multiple of 20.

The bottom line

I really like the turnaround situation developing at Reach. The digital strategy is working, judging by recent figures, and the management team has excellent experience. But taking into account its huge pension liabilities, I think the valuation is up to speed with current events. Therefore, the explosive growth might be over for now. But it’s on my watchlist.

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Dan Appleby has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares), Amazon, and Microsoft. 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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