The demise of a company is usually greeted with glee by shareholders in rival firms. It often leads to a spate of buying activity as new investors, excited by an oft-improved revenues outlook try to grab a slice of the action. The bounce that holiday companies easyJet, TUI Travel and On The Beach following the failure of Thomas Cook in the autumn is perfect evidence of this.
But sometimes the rate of failure is so bad that everyone starts to feel the tension. This is illustrated by the share price decline of The Restaurant Group (LSE: RTN) in the past five years. The mid-level eateries operator has seen its share price plummet more than 80% in that time, a decline that comes despite a high number of competitor failures and a larger number of rival chains cutting their estates left, right and centre.
Too much risk!
A combination of rising business rates, increasing labour costs, and a hugely-competitive marketplace is smashing margins. And there’s evidence of this everywhere, the latest chain to go to the wall this week being Handmade Burger Company with the closure of 19 restaurants.
The Restaurant Group certainly hasn’t been able to reap the rewards of this thinner market. Annual earnings have dropped for the past three years on the spin for which it has already reported. And City analysts expect another bottom-line drop to be disclosed for 2019.
The FTSE 250 firm is cheap as chips. It can be bought on a low forward P/E ratio of 10 times, though I’m not impressed. I’m also unmoved by a robust corresponding dividend yield of 5%. With sales beginning to worsen markedly again — growth slumped to just 0.2% on a like-for-like basis in the six weeks to June 30, most recent financials showed — I think The Restaurant Group’s in danger of extending its share price downtrend. And this could be set off by the release of fresh trading numbers in the coming days.
Drive on by
Inchcape (LSE: INCH) is another company from Britain’s second-tier share index that appears attractively valued. It currently rocks a P/E ratio of just 12.8 times for 2020 and a chunky 3.9% dividend yield.
However, I also believe that this FTSE 250 share also carries too much risk. Financials for 2019 are scheduled for February 27 and I fear that a shocking set of trading numbers could be around the corner here too.
It’s not just that sinking auto demand in the UK is hammering the car retailer right now. Inchcape’s web is spun far and wide. It operates across Europe, Asia, Africa and even Australasia, but this is providing little comfort as car sales fall across all major regions.
LMC Automotive data shows that car sales worldwide slumped to 90.3m units in 2019 from 94.4m units the previous year. And the auto analysts expect sales to drop again in 2020 to 90m units, according to CNN. No wonder City analysts are forecasting another profits drop for Inchcape in 2020. This is another stock I’d also avoid like the plague.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended On The Beach. 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.