If you’re looking for a deep value stock in today’s expensive market, in my opinion, Mears (LSE: MER) certainly deserves your attention. As an outsourcer, Mears is active in a sector that’s hardly been in investors’ best books recently following the collapse of Carillion and crises at Interserve and Capita.
But compared to its struggling peers, Mears looks to be one of the industry’s best bets. Indeed, according to the firm’s figures for the year to the end of December, which were published today, at the end of the year Mears’ net debt was just £25.8m, below reported pre-tax profit from continuing operations of £27m. However, unfortunately, revenue and profit before tax declined overall, falling 4% and 7% respectively year-on-year. Earnings per share fell 8%.
Learning from mistakes
It seems as if Mears’ management has certainly learned from the mistakes of its peers. Commenting on today’s numbers, CEO David Miles stated that “the current pipeline of opportunities for Mears has never been greater” and he went on to say that the firm is currently bidding on “contract values in excess of £2bn during the course of 2018” to add to the existing £2.6bn pipeline. However, Miles also stated that “the Board has decided to adopt a more conservative approach in how it guides the market on its expectations.“
In my view, this new, conservative approach, coupled with Mears’ low level of debt, makes it one of the best outsourcing sector plays. What’s more, based on current City estimates for growth, shares in the company are trading at a forward P/E of 10.3, which is a discount of around 40% to the wider Services sector and implies that there’s already plenty of bad news reflected in the stock. In other words, if Mears goes on to perform better than expected, the shares could re-rate higher by 40%.
Another value stock I like today is the homebuilder Telford Homes (LSE: TEF). Like the rest of its sector, it has put in a strong performance over the past few years, but I don’t believe that this performance is reflected in the company’s current stock price.
Indeed, at the time of writing shares in the firm trade at a forward P/E of just 8.9, falling to 7.5 for 2019. City analysts are expecting earnings per share to jump 29% this year and 18% in 2019, which implies that the stock deserves a higher growth multiple from the market. For the full year to 31 March 2018, the company has already secured 95% of gross profit so, to some degree, the 2018 forecast is no longer just a forecast. Some 65% of gross profit for 2019 has also been secured, according to the group’s interim results.
The fact that Telford has already secured such a large percentage of forecast revenue puts the company in a unique position. Investors can buy into the stock safe in the knowledge that forecasts for growth are not going to change suddenly. There is a certain degree of security here.
And while investors wait for it to unlock value from its land bank, the shares support a dividend yield of 4.5%. So not only do shares in Telford look cheap, but the stock also supports a market-beating dividend yield — what’s not to like?
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Rupert Hargreaves owns no share 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.