Unfortunately, it doesn’t look as if the company’s performance is going to improve any time soon. According to its half-year report, Funding Circle’s business performance actually deteriorated during the first six months of 2019, even though revenue expanded 29%. 

Rising losses

According to the report, group revenue increased by 29% to £81.4m during the first half of 2019, but increased costs pushed adjusted earnings before interest tax depreciation and amortisation down to -£19.7m, from -£13.9m in the same period a year ago.

The adjusted EBITDA margin declined from -22% to -24%. The loss before tax for the period hit £30.8m, up from £27.1m last year. 

Still, despite this performance, the company continues to believe that its adjusted EBITDA loss margin for 2019 will be better than in 2018. I’m doubtful Funding Circle can achieve this performance, especially with Brexit looming at the end of October. City analysts are also sceptical. They’re expecting a full-year loss of £51m, up from last year’s loss of £49m. 

And even though the City is expecting revenue to grow around 45% by 2020, losses will hit £54m by 2020, analysts believe.

With losses set to grow over the next two years, I would sell Funding Circle today, as it doesn’t look as if the company’s share price performance is going to improve anytime soon.

On the other hand, I am much more positive on the outlook for Cineworld (LSE: CINE).

Debt paydown

Cineworld’s acquisition of its larger US peer Regal in 2018 lumped the group with a tremendous amount of debt, which seemed unsustainable at the time. 

However, the company has surpassed all expectations since the deal. It is on track to achieve merger synergies of $150m and, according to Cineworld’s results for the first half of 2019, the business’s debt reduction is ahead of schedule.

Cineworld took on $4bn of debt to buy Regal, but by the end of June, borrowings had fallen to $3.3bn (excluding lease liabilities), primarily thanks to a massive sale and leaseback transaction.

Dividend champion  

Declining debt is just one of the reasons why I think Cineworld could be a great addition to your portfolio. It is also a dividend champion. At the time of writing, the stock supports a dividend yield of 5%, but with earnings per share set to increase by 17% this year, analysts believe the company has scope to increase the payout by 30% to $0.19. If this comes to fruition, it will leave the stock yielding 6.5%.

At the time of writing, the price for this level of income is just 9.4 times forward earnings, which looks to me to be a steal considering Cineworld’s projected earnings growth.

So, if you’re looking for a cheap income play with tremendous growth potential, then I highly recommend taking a closer look at Cineworld today. 

The post One FTSE 250 turnaround stock I’d sell and one I’d buy right now appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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.

Since then, the situation has eased. The latest FCA data provided by research-tree.com indicates that short interest in Metro stock has halved to 6.3%. But that’s still enough to make Metro the 19th most heavily shorted stock in the UK.

Short sellers sometimes get a bad name, but shorting a stock carries a lot of financial risk. If the price rises, your losses are theoretically unlimited. A fair amount of research usually goes into such decisions.

I’m worried too

I share the short sellers’ scepticism towards this business. In January, the company revealed that a chunk of its loans were more risky than it had previously thought. This contributed to the bank’s decision to raise £350m in fresh cash from shareholders in May. Such misjudgement is a warning flag for me.

I also have some concerns about the bank’s rapid expansion of its branch, or ‘store’ estate. Most banks are closing branches. Are Metro’s really so different that they will be more profitable than those of other banks? I don’t know, but I do note that new store openings are now being slowed.

Analysts’ forecasts for Metro’s 2019 earnings have been cut by a staggering 83% to 19.8p per share over the last 12 months. That leaves MTRO stock trading on 25 times forecast earnings.

In my view, that’s too much to pay for a bank that’s only been marginally profitable in each of the last two years. I’d stay away.

How profitable is P2P?

Peer-to-peer lending has exploded in popularity in recent years. One of the biggest players is Funding Circle Holdings (LSE: FCH), which dropped straight into the FTSE 250 when it floated on the stock market in September.

However, there may be trouble in paradise. In its half-year update, the lender said that it now expected 2019 revenue growth to be 20%, down from previous guidance of 40%. Demand for new loans from small and medium-sized businesses is said to have weakened. And Funding Circle has decided to tighten its lending criteria, in response to an increasingly “uncertain economic outlook”.

Losses are expected to continue for at least the next two years. Analysts’ forecasts indicate that an after-tax loss of £42.7m is expected on revenue of £175.4m this year.

Should we be worried?

I’m not suggesting that there is anything amiss with the performance of Funding Circle’s loans or with the credit quality of its customers. But I would note that the peer-to-peer lending model and this company’s high-tech credit scoring system have not yet been tested in a recession.

Looking at the latest data from the company, I can see that the expected loss on the firm’s loans has risen from 1.3% in 2012 to between 2.1% and 4% for the first half of 2019.

The FCH share price has now fallen by more than 70% from its IPO level of 440p, last October. This has reduced the group’s market cap to £425m, but that’s still a slight premium to its last-reported book value of £402m.

In my view, that’s not cheap enough for a loss-making lender at this point in the economic cycle. This is another stock I’d avoid.

The post Warning: investors are still betting against FTSE 250 loser Metro Bank appeared first on The Motley Fool UK.

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Roland Head 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.

However, one area where the bank disappoints is its lack of growth. While the group recently reported a healthy 18% year-on-year increase in profits for 2018, analysts are expecting a more subdued performance going forward. The City has pencilled in earnings per share growth of just 3.6% for 2019.

So while I still believe that the Santander share price presents incredible value for investors and income seekers, I think growth investors will be disappointed. 

With this being the case, I’m considering the outlook for UK fintech startup Funding Circle (LSE: FCH) instead.

Explosive growth

Compared to Funding Circle, Santander looks as if it’s standing still. Today, the peer-to-peer lender reported a 55% year-on-year increase in revenues to £142m which, according to CEO Samir Desai, is another “record-breaking year for the firm.“

However, while revenues hit a record, pre-tax losses also surged, climbing 40% from £36.3m to £50.7m.

Looking forward, management expects this trend to continue. It’s forecasting more revenue growth, but losses are expected to continue for the foreseeable future.

Funding Circle’s management thinks revenues will rise above £200m in 2019, and adjusted operating losses will fall, with the firm remaining loss-making overall. City analysts have pencilled in a net loss of £32m for 2019, a slight improvement on 2018’s figures, although this is based on revenues of £199m.

As the company now expects to beat this top line estimate, I wouldn’t be surprised if we see a number of analysts revisit and reduce their loss estimates for the group this year over the next few weeks.

Different companies 

At first glance, Santander and Funding Circle couldn’t be more different. Santander is one of the largest established banks in Europe that earned €7.8bn in net profits last year. Funding Circle is still losing money and in its early stages of growth.

But despite its losses, I think Funding Circle could be the better long-term buy. One of the reasons why the company is losing so much money is because it’s reinvesting 41% of revenues back into marketing and building the brand. Over time, this marketing spend should fall as the business’s customer base grows.

Indeed, according to the company, in 2018 43% of group revenues came from existing customers, up 67% year-on-year, while 74% of lending also came from existing investors. As existing borrowers and investors are cheaper to acquire, (the cost is virtually zero) Funding Circle makes the bulk of its income matching these lenders and borrowers.

What I’m really excited about is the firm’s potential around the world. Last year, it only generated revenues of £48m from its US and international operations. This is just a snip of these multi-trillion pound lending and borrowing markets. So the opportunity for Funding Circle in these markets is tremendous and, if the enterprise gets it right, the sky’s the limit for the firm’s growth.

So overall, if you own Santander and are you’re wondering what to do with your investment, I reckon it could be worth selling a small percentage of your holding and investing the proceeds in Funding Circle today.

The post This is what I’d do about the Santander share price right now appeared first on The Motley Fool UK.

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• £5,000 invested in this red hot FTSE 250 growth stock last month is now worth…
• Missed the ISA deadline? Ignoring the next one could mean throwing away a £5,150 annual second income opportunity!

Rupert Hargreaves owns no share 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.

With hindsight, and into just its second day of conditional trading on the London Stock Exchange, the answer would seem to be a firm “No”.

With an offer price that turned out to be 440p, Edward pointed out that “the valuation looks quite high.” And with an initial expected market cap of £1.5bn, it’s not hard to see what he meant.

From that initial flotation price, we’ve already seen a fall of 21% to 348p at the time of writing on Thursday. And that was even after the firm’s management went for the lower end of the earlier provisional range of 440p-460p, apparently pressured by institutional investors who saw the valuation as over-optimistic.

Criticism

The investment bankers behind recent high-profile IPOs have also come under pressure over the Aston Martin flotation, which has seen an offer price of 1,900p per share quickly pared back to 1,770p for a loss of nearly 7%. That slashes the hoped-for market cap of around £5bn to a little over £4.1bn, which suggests the company is unlikely to make it into the FTSE 100.

The real shame about the Funding Circle flop, I think, is that it’s a fundamentally sound company offering a very valuable peer-to-peer lending service. By enabling private savers to lend their cash directly to smaller companies seeking funding, the company cuts out the usual banking middlemen with their high charges and makes the deal sweeter for both parties.

Companies get funding at better rates, while savers get a higher return on their cash than if they left it in the bank. In fact, the 5%-6% that fellow Fool Edward has been enjoying is a decent investment return in its own right.

Anything that makes the allocation of capital more efficient and less costly has to be a good thing, and Funding Circle has got in as an early starter with an already solid reputation.

What went wrong with the IPO?

Actually, from the company’s point of view, absolutely nothing went wrong at all — at least not in the short term. The thing is, the purpose of an IPO is to get as much cash as possible for the company being floated — not to provide investors with a bargain purchase price. And the job of a company’s investment bankers is to make that happen.

And it’s no good fund managers and other institutional investors complaining a pricing was too high — if they don’t like an offer price, the obvious answer is to simply not buy at the IPO.

Longer term, a flotation flop like Funding Circle’s could damage confidence in the company if it’s thought to have been too greedy. And initial investors could have to wait some time to get back into the black.

As for me, I’m sticking with my general rule: “Never buy at an IPO.“

The post Why did the Funding Circle IPO flop so badly? appeared first on The Motley Fool UK.

More reading

• How Microsoft’s strong earnings affect the wider stock market
• Up 11% today, could the Magnum Ice Cream share price be an overlooked bargain?
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• £5,000 invested in this red hot FTSE 250 growth stock last month is now worth…
• Missed the ISA deadline? Ignoring the next one could mean throwing away a £5,150 annual second income opportunity!

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.

Founded in 2010, Funding Circle is a peer-to-peer lending platform that allows investors to lend money directly to small- and medium-sized businesses. The first company to offer peer-to-peer lending for business funding here in the UK, it’s grown dramatically in recent years (lending over £5bn to businesses with over 80,000 peer-to-peer investors), and is now looking to IPO.

So what are the details and should you participate?

Funding Circle IPO details

You can apply for Funding Circle shares through ‘intermediaries’ such as Hargreaves Lansdown, AJ Bell Youinvest, and Barclays Smart Investor. If you want to participate in the IPO, you’ll have to act quickly. The ‘intermediaries offer’, which provides retail investors with the opportunity to participate in the IPO and become a shareholder in the fintech company, closes tomorrow. The minimum investment is £1,000.

Should you invest in Funding Circle?

Let me begin by saying I’m a huge fan of Funding Circle. I actually started using the peer-to-peer lending platform around five years ago in order to generate higher returns on my cash savings. Lending my money to small businesses around the UK, I’ve been able to generate returns of around 5-6% per year, which is a much higher return than the returns offered on UK savings accounts. The platform is extremely easy to use and you can withdraw your capital at any time. Overall, I rate Funding Circle’s product very highly.

But is that enough to make Funding Circle a good investment? Looking at the details, I’m not so sure, to be honest.

High valuation

One thing that concerns me about the Funding Circle IPO is that the valuation looks quite high.

The group is planning to offer shares at between 440p and 460p, which would give the company a market valuation of a whopping £1.5bn.

When you consider that Funding Circle isn’t yet profitable (last year made a loss of £35m), that valuation certainly adds risk to the investment case.

On the positive side, the group is generating revenue and is growing quickly. Last year, revenue surged from £50.9m to £94.5m and in the first half of 2018, revenue increased 62%. Yet if we assume revenue grows at 60% this year to approximately £151m, the £1.5bn valuation places the stock on a forward-looking price-to-sales ratio of just under 10, which looks lofty. In comparison, US peer-to-peer lending rivals OnDeck Capital and LendingClub trade on forward-looking price-to-sales ratios of 1.5 and 2.25, respectively.

Share price performance

It’s also worth noting the performance of these US peer-to-peer lending companies since their stock market listings. As my colleague Rupert Hargreaves points out, since their 2014 IPOs, OnDeck has fallen around 60%, and LendingClub has declined by around 75%. Both have struggled to find growth.

As such, I’m not convinced Funding Circle is a great investment right now. There’s just a little too much risk for my liking. I’ll be sitting on the sidelines for this IPO and watching to see how things pan out.

The post Should you participate in the Funding Circle IPO? appeared first on The Motley Fool UK.

More reading

• How Microsoft’s strong earnings affect the wider stock market
• Up 11% today, could the Magnum Ice Cream share price be an overlooked bargain?
• As Endeavour Mining shares jump 7% on Q1 results, is this a way into the gold rush?
• £5,000 invested in this red hot FTSE 250 growth stock last month is now worth…
• Missed the ISA deadline? Ignoring the next one could mean throwing away a £5,150 annual second income opportunity!

Edward Sheldon owns no share mention. 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.