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A turnaround stock to buy after 10% share price hike?

With Purplebricks Group being the darling of the sector after its aggressive and successful TV advertising campaign, it’s hardly surprising that investors have been shying away from more conventional estate agency businesses and that their share prices have been falling.

But I reckon the focus is too heavily biased towards the newcomer now,  and even though the shares have fallen back a bit, I still wouldn’t buy.

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Recovering rival?

Sentiment could already be swinging back, as we saw a 10% share price hike for rival Foxtons (LSE: FOXT) on Tuesday, with the shares now trading at 73p.

There was no news on the day, but the spike comes a day before the firm is expected to release a third-quarter update, so optimism appears to be high. What should we expect?

Analysts are currently forecasting a 50% drop in EPS for the full year after a similar crash last year, but even after the firm’s interim results, it might not be as bad as expected. In the first half, pre-tax profit was slashed by 64% to £3.8m and basic earnings per share (EPS) crashed by 74% to 0.43p.

There could be some optimism rebuilding for the second half, despite the firm’s warning that it expects “conditions to remain challenging for the remainder of 2017.

One thing I do like is the company’s liquidity. At the halfway stage, chief executive Nic Budden told us that Foxtons has “a robust balance sheet, good cash generation and … no debt,” adding that, despite political and economic uncertainty, he expects London “to remain a highly attractive property market for sales and lettings.

The forward P/E remains high with a forward multiple of around 22 on the cards for 2018 (after a predicted 13% rebound in EPS), but further recovery could drop that to attractive levels. 

Better value?

For a candidate in the same sector with a lower valuation, I’ve been looking at Countrywide (LSE: CWD), whose shares have crashed by more than 80% from their peak in March 2014 to 119p as I write.

Plummeting earnings have been behind the fall, with EPS set to drop for three years in a row if current 2017 forecasts prove accurate, and the previously attractive dividend yield of around 3.5% has been wiped out.

But forecasts put the shares on a low P/E of only eight, which would drop to around 7.5 based on 2018 forecasts — while the dividend would come back nicely to offer a yield of 2.7%. Is that the steal that it appears?

Well, caution is needed, because Countrywide is not debt-free like Foxtons. In fact, at the end of the first half in June, the company reported net debt of £217m. That was down from £248m at the same stage the previous year, but only after a new placing in March 2017.

And to put the debt level into perspective, it’s the equivalent of 77% of the entire market capitalisation of the company — and that scares me. In fact, on that score, I can’t help thinking that a P/E ratio of under eight is perhaps still overvaluing the firm.

Having said that, with a highly-leveraged company like this, the leverage can work to investors’ advantage too — if an earnings recovery does set in and continue over the next few years, we could see an upwards re-rating of the share price.

Too risky for me, though.

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Alan Oscroft has no position in any 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.