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Provident Financial plc isn’t the only turnaround stock I’m considering buying for my ISA

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Shares of former growth stars Provident Financial (LSE: PFG) and Hikma Pharmaceuticals (LSE: HIK) have fallen so spectacularly that both companies have lost their FTSE 100 status.

The big question for investors today is whether these are broken businesses, doomed to struggle in coming years, or great businesses, suffering temporary setbacks but destined to return to their former glories. If the latter, they could be great stocks to tuck away in an ISA, sheltered from tax on terrific long-term capital gains and dividends.

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On Monday, Hikma announced that the US Food and Drug Administration requires it to complete an additional clinical endpoint study for its generic version of GlaxoSmithKline‘s Advair Diskus asthma drug. The news wasn’t altogether unexpected and while the investment case for Hikma by no means rests on the fate of the product, it’s bad news that it won’t now reach the market until at least 2020.

Today, Hikma released its annual results, posting a statutory loss for the year of $839m. The shares are trading at 950p, as I’m writing, 9% up on the day but still well down from a 52-week high of near to 2,300p.

The statutory loss was largely due to a huge non-cash impairment on reduced expectations for the portfolio and pipeline of the group’s generics arm, in light of “increasingly competitive dynamics of the US market, including intense pricing pressure.”

Still fundamentally attractive

Despite the headwinds in US generics (and the US generally to a degree), I believe Hikma remains a fundamentally attractive investment proposition. Its diversified business including branded and injectables — and a strong position in the Middle East and North Africa — delivered total revenue of $1,936m in 2017 (1% down on the prior year but up 1% at constant currency) and record cash flow from operations of $443m.

Core earnings per share (EPS) of $1.05 (75p) give a price-to-earnings (P/E) ratio of 12.7, which strikes me as highly attractive. And with management showing its confidence by increasing the dividend from $0.33 to $0.34 (24.3p), giving a handy 2.6% yield, the shares look very buyable to my eye.

Future growth targets

Compared with Hikma, the troubles of Provident Financial have been legion. The non-standard (a.k.a. sub-prime) lender removed a good bit of uncertainty in its recent annual results. It announced a settlement (estimated cost of £172m) in connection with its Vanquis Bank’s Repayment Option Plan, following an investigation by the Financial Conduct Authority (FCA), and also put an estimated number (£20m) on an ongoing FCA investigation into its Moneybarn business. In addition, it announced a £300m fundraising and said its Provident Home Credit division is beginning to recover after last year’s disastrous change to its operating model.

At 935p, the shares are up from their pre-results multi-year low but are still way below a 52-week high of 3,265p. Despite the recent news providing some clarification, I still see the situation as too messy and uncertain at this stage to be confident of management realising its targets for future growth. With underlying EPS of 62.5p giving a P/E of 15, I’m going to avoid this stock for the time being.

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