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Why Provident Financial plc could be flashing a warning for 2018

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The trading update released by Provident Financial (LSE: PFG) on Tuesday showed the lender’s outlook remains tough. Its performance in 2017 was relatively disappointing, and this sent its share price lower by as much as 10% on the day of release.

Looking ahead, it would be unsurprising for there to be more falls in its share price in the short run. Here’s why the stock could be one to avoid in the near term, at least.

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Disappointing performance

Perhaps the most disappointing part of the update was the fact that its Consumer Credit Division is expected to report a pre-exceptional loss at the upper end of guidance provided in August 2017. It’s expected to lose £120m in 2017. But more worrying for investors is the fact that the expected rate of reconnection with customers — who had seen their relationship with the company adversely affected by the migration to the new operating model — was lower than anticipated.

This lower than expected rate of reconnection means that the turnaround potential of the home credit division may be lower than many investors had anticipated. In fact, it could mean that a proportion of previous customers are now lost, and that the division will have to rebuild at a much slower pace. This could mean that the financial performance is less impressive than previously forecast.

Investigations

In addition, Provident Financial remains under investigation by the FCA. It is co-operating with the regulator, but with two investigations ongoing, there could be further volatility in its share price. Investor sentiment could be held back while the investigations continue. Should their outcomes be negative to the business, it could lead to a fall in the value of the company. As such, it may be prudent to wait for further updates before buying the company – especially while it is still searching for a new management team.

Investment opportunity

While Provident Financial may be a stock to avoid at the present time, financial services sector peer St. James’s Place (LSE: STJ) could generate impressive share price performance. The wealth management company is expected to post a rise in its bottom line of 25% this year, followed by further growth of 19% next year. Despite this strong rate of growth, it trades on a price-to-earnings growth (PEG) ratio of just 1.1. This suggests that it may be undervalued in what remains a buoyant wider stock market.

St. James’s Place also offers a bright future from an income perspective. It’s expected to post a rise in dividends of 33% over the next two financial years. This means it could be yielding as much as 4.4% in 2019, which could boost investor interest in the stock. With the global economic outlook continuing to be generally positive, and investor sentiment remaining optimistic, the investment prospects for the stock could prove to be very impressive.

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Peter Stephens has no position in any company 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.

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