The Motley Fool

Centrica and Convatec share prices slump 25%+, but could they offer recovery potential?

The share price of global medical products and technologies company Convatec (LSE: CTEC) declined by as much as 30% on Monday following a profit warning. Of course, it is not the first stock to experience significant falls in its share price due to disappointing financial performance. FTSE 100-listed Centrica’s (LSE: CNA) share price has declined by 60% in the last five years.

Looking ahead, further volatility could be on the cards for both stocks. At the same time though, they may now offer wider margins of safety and could therefore provide more compelling investment potential for the long term.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

Uncertain outlook

Convatec’s profit warning was due to a change in inventory policy by the biggest customer in its Infusion Devices franchise. This is expected to have a material negative impact on revenue in the fourth quarter of the year of $18m-$23m. The company also experienced challenging market dynamics in specific markets in its Advanced Wound Care segment which contributed to a difficult period for the business. As such, it now expects full-year organic revenue growth of between 0% and 1%. This is down from previous guidance of between 2.5% and 3%.

Alongside a profit warning, the company also announced that its CEO, Paul Maroviec, has decided to retire. He has stepped down as CEO with immediate effect and will be replaced on an interim basis by Rick Anderson, who is currently a non-executive director of the company.

Convatec is clearly in an uncertain period at the present time. Volatility could continue and investor sentiment may remain weak in the near term. However, with what seems to be a sound overall business, its prospects for a long-term recovery seem to be bright.

Recovery prospects

As mentioned, the Centrica share price has endured a challenging period in recent years. The company has experienced a mix of internal and external challenges that have combined to produce a disappointing performance for its investors. For example, it has suffered from a weak outlook for the oil and gas industry in recent years, while its decision to pivot towards domestic energy supply has caused investors to become concerned about regulatory and political risk to a greater extent.

Looking ahead, the company’s shares could become more popular if the world economy experiences a difficult period. They may provide a degree of defensive appeal for investors who are looking for companies which have lower correlation to the performance of the wider economy. Its dividend yield currently stands at 8%, and while it is covered just 1.1 times by profit, the company’s declining bottom line of recent years is due to come to an end in the current year.

Clearly, Centrica’s share price decline could continue in the near term. However, with what seems to be a sound strategy to improve its efficiency, the company could prove to be a sound turnaround opportunity over the coming years.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Peter Stephens owns shares of Centrica. 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.