Sometimes the market offers you an opportunity that’s too hard to pass up and seems as if this has happened with toy producer Character Group (LSE: CCT) today.
Shares in Character are trading down by around 10% today after the company issued a quasi-profit warning last night. The collapse of Toys R Us, one of the group’s biggest customers, has muddied Character’s outlook for 2018 and as of yet, management does not “know the extent to which this will impact our trading position with them.” As a result of this uncertainty, the company has no “reliable visibility on the important 2017 Christmas trading period.”
Worryingly, the update also noted that “conditions in the wider market generally remain challenging.“
The market hates uncertainty, and that’s why shares in Character have plunged in early deals. However, I believe that this decline presents an opportunity for value hunters.
Value in cash
The decline of Toys R Us is a headache for Character, but it’s not the end of the world. The company, which is swamped with more than $5bn in long-term debt, hopes that by entering Chapter 11 bankruptcy, and gaining protection from its creditors, it will be able to restructure and bring its “vision to fruition.” In other words, this isn’t the end of the company and orders for Character’s products are unlikely just to vanish overnight.
That’s why I believe that today’s declines present a great opportunity for investors. The shares now support a dividend yield of 3.7%, and there’s more than £18m of net cash (18% of the market value) on the balance sheet to support the business and dividend, which costs £2.8m per annum.
The shares currently trade at a forward P/E of 9.4 on estimates for the year ending 31 August 2017. As it’s not possible to gauge how much of a headwind Toys’ bankruptcy will prove to be for the business, this valuation offers a margin of safety for investors. Even a 15% decline in earnings per share would only bring the valuation back up to the sector median of 15.2.
Growth concerns have also held back shares in telecoms company Manx Telecom (LSE: MANX) over the past 12 months.
Last week the company, which provides communications services on the Isle of Man, reported a pre-tax profit for the first half of £5.2m, down from £6.3m in the prior period as revenue slipped to £38.5m from £39.2m. Investors responded to these results by sending the shares lower by 3%.
Nonetheless, despite slowing revenue growth, I believe shares in Manx look attractive based on the company’s income potential and valuation.
Manx currently returns the majority of its income to investors via dividends. For example, over the past two years, the firm has generated free cash flow from operations of £30.8m and returned £23.4m of this to investors. This generous cash return policy looks set to continue with City analysts predicting a dividend payout of 11.4p for 2017 and 11.9p for 2018, indicating a dividend yield of 6% for 2018 at current prices.
As well as this market-beating dividend yield, shares in Manx also look cheap compared to the rest of the telecoms sector. Specifically, shares in the telecoms firm trade at a forward P/E of 13.6, based on City estimates for 2017 while the rest of the sector trades at a median P/E of 14.2.
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Rupert Hargreaves does not own shares in any company mentioned. The Motley Fool UK has recommended Manx Telecom. 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.