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Why I’d ditch this growth stock for Provident Financial plc

Today’s release of full-year results from MySale Group (LSE: MYSL) appears to have driven the stock down. The share price is more than 8% lower as I write, but in fairness, since 11 September, in the run-up to these results, we are still more than 12% higher at today’s 110p – I reckon it’s safe to say that the market anticipated good news.

Trading well, but…

The firm is an international online retailer of fashion, apparel, health, beauty and homewares, running flash sales and retail websites in Australia, New Zealand, South East Asia and the UK. A decent outcome shows in the figures for the year with revenue 6% higher than a year ago and underlying earnings per share shooting up 500% to 2.5p.

However, underlying profit before tax came in at just £3.3m, which is a little over 1.2% of the revenue figure for the year. Compare that BooHoo.Com’s net margin running around 10% and ASOS’s at a little over 4%, and it seems clear that MySale has work to do before the level of profitability will be comfortable.

I could be patient on margins if the revenue suggested that MySale is an emerging fast-growing business worthy of its high valuation. But 6% growth in revenue strikes me as pedestrian. ASOS, for example, expects forward revenue to surge by 25% and Boohoo by 33%.Both are growth figures that suggest the potential for rapid forward escalation in earnings.

Everything to prove

MySale’s forward price-to-earnings (P/E) ratio runs at a whopping 76 or so for the year to June 2018, and I think that’s too high for a firm that still has everything to prove, so I’d ditch the stock in favour of the turnaround story at Provident Financial (LSE: PFG).

Provident supplies non-standard personal credit products and its shares plunged by more than 76% this year to match a profit collapse brought on by an ill-judged change to the operating model. A new home credit model involving employed full-time customer experience managers kicked in during July to replace previously self-employed agents. The transition didn’t work out as smoothly as planned and in August the firm told us that successful revenue collections were running at 57% versus 90% during 2016. On top of that, sales were around £9m per week lower than the comparative weeks in 2016. The director’s forward guidance is for a pre-exceptional loss for 2017 of between £80m and £120m – oh dear! 

Turnaround potential

Naturally, the company is engaged in a “thorough and rapid review” of its operations with the aim of turning the business around. City analysts following the firm think the directors will succeed and predict an earnings bounce-back of around 57% during 2018. Meanwhile, the current share price of 758p throws up a forward P/E ratio of just over seven for 2018 and the forward dividend yield sits at almost 6%. Those forward earnings should cover the payout almost two-and-a-half times.

Assuming that Provident Financial can sort out its problems, which I think it will, the valuation looks cheap and the stock is more attractive to me than MySale.

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Kevin Godbold 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.