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Why I’d buy super-growth stock IQE plc over Provident Financial plc

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Pop the Champagne corks! Bring out the bunting! Finally there is some good news for beleaguered investors in doorstop lender Provident Financial (LSE: PFG). This morning it published a trading statement covering the period from 1 January to 8 May and its share price has leapt a jubilant 7.51% as a result.

Praise be

This a provident day for the troubled financial company, which reported that each of its three businesses started 2018 with “positive momentum which provides a strong foundation for delivering the group’s plan for 2018 as a whole”.

Its Vanquis Bank has delivered profits ahead of plan in the first quarter with robust margins and operational leverage, while Moneybarn delivered “strong new business volumes”, with impairments still tracking modestly above expectations but delinquency trends improving.

Can you credit it?

The recovery plan at its troubled home credit business is on track, apparently, delivering “a good collections performance during the critical first quarter trading period”. The group further cheered investors by reporting that following the recent rights issue, its capital position and liquidity are both strong, while the process to recruit a new chairman and additional non-executive directors is well under way.

CEO Malcolm Le May said the group is making good progress in strengthening its governance framework and changing the company’s culture to put customers at the heart of its strategy. “This will provide the basis for delivering attractive and sustainable returns to shareholders.”

Bargain buy

My Foolish colleague Kevin Godbold continues to shun Provident Financial, noting that it has seen the bottom fall out of its business model. Yet bargain hunters have been rewarded with a 21% share price rebound over three months, and today will lend further encouragement. City analysts reckon earnings per share (EPS) could rise 9% this year, and 35% in 2019. However, it is no longer dirt cheap with a forward valuation of 11.8 times earnings, and a full recovery is likely to take some time.

While Provident Financial has lost two thirds of its share price value over two years, Welsh semiconductor technology firm IQE (LSE: IQE) has multi-bagged, its stock rising 493% over the same period. This looks like a classic recovery versus momentum play, so which do you prefer?

High-IQ stock

The AIM-listed group, which has a market capitalisation of £900m, manufactures wafers for a host of global chip companies, with its products ending up in Apple’s iPhone X. It reported an 18% increase in adjusted profit before tax to £24.3m in 2017, with wafer sales up 16% to £154.5m. 

Citigroup recently reiterated its buy note with a target price of 195p. With the stock trading at 120p today, that gives potential upside of a further 62%. Royston Wild recently labelled IQE the stuff of legend, and believes it can continue to deliver stunning profits.

This is a view shared by City analysts, who predict EPS will rise 8% in 2018, and a whopping 39% in 2019. It is not cheap, trading at a forecast valuation of 28.9 times earnings, and given high expectations, even the slightest setback can play havoc with its share price. Any shift in demand, especially from Apple, could hurt. However, IQE’s momentum is sweeping all before it today.

Capital Gains

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Harvey Jones has no position in any of the shares 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.