Why I’d dump this 7% yielder, and what I might buy instead

This stock is priced very cheaply, but after a profit warning, here’s why I think it’s one to be avoided.

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If you’re looking at a stock on a forecast P/E of only seven, with a dividend yield of 7%, you might think you’re looking at a super-cheap bargain. Well, either that or a company priced as if it’s going bust.

If I tell you it’s car dealer Lookers (LSE: LOOK), and that the share price has fallen 75% since December 2015 and by more than 50% over the past year alone, would that help swing you towards one of those two options?

After a dire profit warning on Friday, together with news that both the CEO and COO are jumping ship, the shares plunged by a massive 30% in early trading, though by the time of writing, they’ve pulled back to a 12% loss on the day so far.

Profit crash

Confirming the firm’s interim talk of “weakness in consumer confidence in the light of political and economic uncertainty, pressure on used car margins and retail cost inflation,” Lookers has warned that underlying pre-tax profit for the year is set to come in as low as £20m. That’s 48% below the £38.5m the City had pencilled in, and 60% down on 2018’s reported figure.

In the light of that, we need to adjust those headline forecasts. Assuming a similar downgrade to the bottom line EPS figure, a more realistic P/E multiple would be around 11, which is not a screaming bargain. And as for the predicted dividend, I can’t see that happening now.

If that wasn’t enough, net debt at the halfway stage of £73.9m was more than three-and-a-half times the expected full-year pre-tax profit. That puts Lookers firmly into bargepole territory for me.

Renewed growth?

One company in the news Friday that catches my attention for better reasons is hospital group Spire Healthcare (LSE: SPI), as it reported the sale of Baddow Specialist Care Centre and Bristol Cancer Centre to GenesisCare for £12m. It’s part of a partnership between the two companies to “create a national end-to-end private cancer care pathway,” and I’d say it marks steady progress on that front.

What draws me to Spire mostly is its status as something of a fallen growth story. If progress at a great growth hope starts to falter, as it has done at Spire over the past couple of years, the share price can crash heavily. So when profit warnings started kicking in during 2018, my colleague Peter Stephens suggested thatit would be unsurprising for the company’s share price to deliver further declines in the short run.” He was spot on, and Spire Healthcare shares are now down 60% over the past two years.

Price uptick

But the price has been picking up again over the past few months, and I can’t help thinking I’m seeing a genuine long-term growth prospect that could be set to come out of its downturn before too long.

This year should see a further drop in earnings of around 25%, but a similarly sized upturn forecast for 2020 could mark a turnaround point. It would put the shares on a P/E of 18, which I think is probably about middling considering the recent profit weakness and the potential for better to come.

Dividends of around 3% add a bit of a sweetener, and I’ve got Spire Healthcare on my watchlist.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

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