The Motley Fool

Why I believe the Dignity plc share price is now too cheap to ignore

Having fallen by 63% in the last year, the share price of funeral services provider Dignity (LSE: DTY) may seem like a risky investment. After all, investor sentiment is exceptionally weak after the business released a profit warning. As such, further declines in its valuation cannot be ruled out in the short term.

But now, there seems to be a wide margin of safety on offer. This could provide the potential for high returns in the long run. And while volatility may be above average, the value investing prospects on offer could make it a worthwhile buying opportunity.

Difficult period

Dignity is currently experiencing highly challenging trading conditions. Competition within its various segments has increased in recent periods and this has placed pressure on pricing. In response, the company has decided to make changes to its pricing structure as it seeks to maintain what is a relatively dominant position within its key markets.

As such, the financial performance of the business is due to decline dramatically in the short run. In fact, in the current year it is forecast to report a reduction in earnings of 47% on a per share basis. This could hurt investor sentiment and should similar trading conditions continue over subsequent periods, additional declines in the stock’s price cannot be ruled out.

Margin of safety

However, after its significant share price fall, Dignity now appears to offer a wide margin of safety. For example, it trades on a forward price-to-earnings (P/E) ratio of around 13. This takes into account its expected fall in earnings in the current year and suggests that investors have factored-in the difficulties which the business is expected to face.

Looking ahead, the company is due to report a flat EPS growth rate in the next financial year. Beyond that, a recovery could be ahead, since the business seems to have a strong position in what remains a relatively robust industry. And with volatility in stock markets expected to remain high, its low valuation and turnaround potential could appeal to an increasing range of investors.

Resilient performance

Also facing difficult trading conditions at the present time is Hollywood Bowl (LSE: BOWL). The tenpin bowling company reported a strong update on Monday despite the challenges facing UK consumers. Its revenue grew by 9.3% in the first half of its financial year, while like-for-like (LFL) revenue was 4% higher. This shows that its refurbishment programme and focus on improving customer service levels seems to be working well.

Looking ahead, Hollywood Bowl is forecast to increase its bottom line by 9% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.7, which suggests that it offers good value for money. And while consumer confidence in the UK may be at a low ebb right now, the company’s business model appears able to overcome further difficulties. This could mean that its share price performance improves so as to deliver a high level of capital growth in the long run.

Capital Gains

In the meantime, one of our top investing analysts has put together a free report called "A Top Growth Share From The Motley Fool", featuring a mid-cap firm enjoying strong growth that looks set to continue. To find out its name and why we like it for free and without any obligations, click here now!

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Hollywood Bowl. 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.