The Motley Fool

Are these two 15% losers good value, or falling knives to avoid?

Shares in McBride (LSE: MCB) slumped 18% Tuesday morning, after downgrading its full-year expectations based on first-half performance. The maker of cleaning and hygiene products now expects adjusted pre-tax profit to come in around 15% below the current market consensus.

A slowdown in the final two months of the period have impacted revenues, and the firm also blamed the fall partly on its decision to exit UK aerosol manufacture in the fourth quarter of the previous year.

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!

Net debt at 31 December came in at £113.5m, down from £120m six months previously (excluding any IFRS 16 effect), and the firm says it is “comfortably within all of its banking covenants.” But those covenants don’t seem too strict, allowing net debt-to-EBITDA to reach as high as three times (according to McBride’s last full-year results statement), so I certainly would not dismiss that debt as a concern.

International

One thing I do like about McBride in these times of domestic economic troubles is its international diversification, with only 26% of its £673m revenue coming from the UK — though that UK revenue is 5.6% higher than the prior year.

So what do I think about McBride as an investment? Well, a low P/E of nine, and well covered dividend yields of around 4.2% make it look attractive… until I remember debt. That £113.5m is equivalent to 93% of the firm’s market cap, which suggests that we’re looking at a debt-free equivalent P/E of around 17.

In turbulent times, I do like global diversification, but I don’t like debt. And I also don’t like to see big dividends paid by indebted companies in low-margin businesses, so I’m out.

Chemicals

Shares in Elementis (LSE: ELM) also suffered an 18% fall when the market opened, pulling back to a 12% shortfall by mid-morning. That continues a sharp slump that started on 2 January, and Elementis shares are now down 23% over 12 months and 47% over two years.

The reason this time is a new profit warning from the speciality chemicals firm, which now says it expects adjusted operating profit for 2019 of between $122m and $124m, well below 2018’s $133m.

Chief executive Paul Waterman told us that 2019 performance was “negatively impacted by a challenging market backdrop as the more cyclically exposed parts of the portfolio like Chromium and Energy have deteriorated through H2.”

That does show some of the risk with companies like this (and with commodities stocks in general), that they’re exposed to economic cycles and to world prices over which they have no control.

Turnaround

Earnings at Elementis have been under pressure for a few years, and analysts had been expecting a 17% EPS drop for 2019. It’s likely to be a bit worse than that now, but a 9% uptick forecast for 2020 would give us a P/E for Elementis shares of around 12 (with a further earnings rise forecast for 2021 of 11% dropping it to 11).

I’d find that attractive, except for one thing… that dreaded debt. At the halfway stage at 30 June, net debt stood at $509m. That represented a net debt-to-pro forma adjusted EBITDA of 2.8x, although the firm expected that to drop to 2.4x by year-end.

I think Elementis could be a long-term buy, but I want to see more debt reduction first — get that ratio below 2x and I might be interested.

A top stock with enormous growth potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business.

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has been helping it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 alone it returned a whopping £151.1m to shareholders in dividends and buybacks!

And here’s the really exciting part…

We think now could be the perfect time for you to start building your own stake in this exceptional business—especially given the two potentially lucrative expansion opportunities on the horizon that our analyst has highlighted.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Stock… free of charge!

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Elementis. 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.