Everybody loves a good horror story, and that includes investors if the circumstances are right. The best time to invest in a company is often when blood is on the streets, and most investors are hiding in fright. Dare you buy these three?
Outsourcing specialist Capita Group (LSE: CPI) endured a brutal 2016, its share price crashing to a 10-year low in September following a profit warning. A slowdown in parts of the business, one-off costs and client hesitation all inflicted damage. Brexit, high financial gearing, falling sales and weak growth made things worse. The stock is now down 50% in the last six months.
Capita now trades at just 7.27 times earnings and yields a tempting 6.2%, still nicely covered 2.2 times. There’s clearly further trouble ahead, with earnings per share (EPS) forecast to drop another 7% this year, although they’re expected to recover to rise 4% in 2018. The company’s share price has stabilised in recent days and the worst may now be over, unless we get another profit warning. Even horror stories can have a happy ending.
Budget airline easyJet (LSE: EZJ) has plunged 36% over the past 12 months with little sign that it’s set to pull out of its spiral, plummeting 11% in the last month alone. Falling revenues per seat, tough competition from rivals Ryanair and Wizz Air, the ongoing terror threat and weaker sterling in the wake of Brexit have conspired to hit passenger demand.
The market seems to have discounted Monday’s positive update, with January’s passenger numbers up 11% year-on-year and the load factor (which measures how full flights are) climbing slightly from 85% to 86.2%. It isn’t the only airline struggling, on Monday Ryanair Holdings posted an 8% drop in Q3 profits, suggesting a troubled sector.
Easyjet could be turbulent for some time yet, with EPS forecast to fall 28% in the year to 30 September 2017, on top of last year’s 22% drop. Long-term investors may enjoy bluer skies, with EPS forecast to rebound 14% the year after that. However, today’s valuation of 8.6 times earnings, a high-flying yield of 5.8%, covered twice, all point to a bright investment prospect, if you can give it time.
Education specialist Pearson (LSE: PSON) has suffered a recurrent nightmare over the past five years, with the share price down 45% in that time. The nightmare continues: the stock is down 20% in the last month alone. This is a real high school slasher movie, with the group’s January trading update horrifying investors by warning of a further unprecedented decline in North American higher education revenues.
This has left Pearson trading at just 9.3 times earnings and yielding a whopping 7.9%. But don’t be misled by that headline figure, the forward yield is just 4.6% after its recent dividend cut. Like the music industry and newspapers, the company is battling to survive the shift to digital, which has hit revenues from textbooks and testing. It’s now looking to offload its stake in Penguin Random House to fund investment in new technologies and turn around its fortunes. Pearson has a long road ahead of it, with danger lurking around every corner. It still looks a frightener to me.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.