MENU

Centrica plc isn’t the only turnaround stock on offer today

Image source: Getty Images.

All companies have to adapt and evolve over time in order to keep growing and deliver improving returns for their shareholders. However, British Gas brand owner Centrica (LSE: CNA) has rather lurched from one strategy to another since its demerger from British Gas plc in 1997.

I’ve been critical of its erratic history, failure to find a way to deliver sustainable earnings and dividend growth and poor long-term share performance. However, such companies do tend to go through phases where they deliver excellent turnaround returns for value investors, who buy low and sell high.

With Centrica’s shares having this month plumbed depths not seen since last century, could now be the perfect time for value investors to jump in for a recovery?

Waiting game

The market had been told, via a profit warning in November, of a poor performance for 2017. The annual results were released last week and the shares have actually advanced a little in response, as the numbers were only as grim as the market expected. Nevertheless, grim they were. Statutory earnings per share (EPS) plummeted 81% to 6p and even excluding all the nasty stuff, adjusted EPS dropped 25% to 12.6p. The board declared a 12p dividend for the third year running, having reduced the payout in each of the two prior years.

At a current share price of 142p, the trailing price-to-earnings (P/E) ratio is 11.3 on the more favourable adjusted EPS number. The dividend yield is a whopping 8.5%.

Chief executive Iain Conn told investors: “I am determined to restore shareholder value and confidence.” However, with the company continuing to bleed customers and the headwinds from political and regulatory intervention in the energy market, I believe things may well get worse before they get better. If so, the dividend would likely be cut (as some analysts are already forecasting) and the share price could fall further. As such, I’m continuing to avoid the stock at this stage.

Skin in the game

Another potential turnaround prospect beckoning investors is FTSE SmallCap firm Devro (LSE: DVO). This company, which has the long-form description “one of the world’s leading manufacturers of collagen products for the food industry” and the short-form version “sausage skin maker,” released its annual results today.

The first year of Devro’s three-year plan to deliver revenue growth and cost savings across its global operations has progressed well, with the company delivering a top-line advance of 7% thanks to increased volumes. It exceeded its cost reduction target and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 9%.

However, EPS dropped to 12.5p from 13.3p. This was due to higher finance costs, which will begin to fall, because the company has completed major capital investment projects. As it is, strong cash generation in 2017 saw net debt reduce to £135m from £154m and the net debt-to-EBITDA ratio come down to a healthier 2.1 from 2.7.

At a share price of 199p (little changed on the day), Devro’s trailing P/E is 15.9 and its dividend yield is 4.4% on a maintained 8.8p payout. In my view, the business is now well positioned for strong earnings and dividend growth in the coming years and I rate this turnaround stock a ‘buy’.

Could Devro help you make a million?

Investing in turnaround stocks is not without risk but it does have the potential to deliver bumper returns. However, there are also other investing strategies that can boost your wealth. In fact, it may surprise you to know that the experts at the Motley Fool have figured out that a seven-figure-sum stock portfolio is within the reach of many ordinary investors. And they've published their findings in a FREE report called 10 Steps To Making A Million In The Market.

To enhance your wealth-making prospects, I urge you to read their straightforward step-by-step guide. There are no strings attached, simply CLICK HERE for your free copy.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Devro. 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.