Do you like buying growth stocks on bad news hoping that the market has overreacted? Then you’ll be tempted by FTSE 250-listed Metro Bank (LSE: MTRO), whose stock crashed more 15% on Tuesday, and another 20% today.
Yesterday’s plunge was caused by the challenger bank’s announcement it plans to raise £350m through a new share sale to fix the shortfall on its balance sheet. Last month’s news that an internal blunder led to the incorrect risk classification of millions of pounds of commercial property loans had already driven its stock to record lows.
Worse, Metro claims to have spotted the error itself, but the source turned out to be the UK regulator. It’s is now being probed by the Prudential Regulation Authority and Financial Conduct Authority.
Today’s full-year results looked pretty good with deposits up 34% to £15.7bn and lending growth up 48% to £14.2bn. However, net interest margins dipped from 1.93% last year to 1.81%, due to strong competition in the mortgage market and higher funding costs.
A 140% rise in underlying profit before tax to £50m may look good, but was below analyst forecasts of £53.6m, while earnings per share of 39.4p were below the 42p estimated.
Chief executive Craig Donaldson nonetheless hailed a “strong set of results demonstrating progress across all key areas despite an uncertain and challenging environment.” These are pretty solid results for the £1bn bank, even if they did undershoot slightly.
City analysts are still pencilling in 77% earnings growth in 2019, and 66% the year after, even if this marks a slowdown from 110% growth in 2018. However, there’s no dividend and the stock looks a little expensive at 20.3 times earnings. That regulatory investigation and new funding announcement will also weigh on sentiment.
I still think Metro has a strong offering but you must be brave to buy it today. Rupert Hargreaves saw a lot of this coming.
Broadcaster ITV (LSE: ITV) is down 3.5% at time of writing after CEO Carolyn McCall announced a “strong” 2018 operational performance with total external revenue up 3%, including total advertising revenues up 1%.
She highlighted “an impressive” 3% growth in total viewing on the back of shows such as The Voice, Bodyguard and Love Island. ITV also excited analysts with talk of a new strategic partnership with the BBC to create streaming service BritBox for UK audiences.
McCall did warn of the impact of economic and political headwinds on the advertising market, although who doesn’t these days? The final dividend of 5.4p lifted the full-year payout to 8p per share, up 3% on 2017.
In need of a break
Investors will admire its forecast dividend yield of 6.3%, with cover of 1.7, as well as its lowly valuation of just 9.6 times earnings. ITV is under pressure from Netflix, Google, Facebook and Amazon, which is a brutal roster of competitors. It has made a forward-looking move into pay-per-view and selling content to worldwide channels through its ITV Studios business, while BritBox as been successful in the US.
It’s a tough world out there and ITV will have to run at full speed just to keep up. It could just be the buy of the decade, though.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.