The shares finished 1.7% up on the day at 89.15p. With City analysts forecasting earnings of 48.5p per share for the company’s current financial year (ending 30 June 2020), the stock is on offer at an extraordinarily low valuation of just 1.8 times earnings. Could this once-FTSE 250 (but now small-cap) stock be the buy of a lifetime, or is its rating simply too good to be true?

Good news

To flesh out the good news in Friday’s trading statement, the company said it continues to focus on operational cash generation, with working capital and net debt both in line with the board’s expectations.

It said that since 30 June 2019 it’s been awarded £1bn of new contracts and been appointed to a number of frameworks, including the £30bn Construction Works and Associated Services framework for the Crown Commercial Service.

Finally, it also said it remains on course to deliver a headcount reduction of 1,200 by 30 June 2020 and annual cost savings of at least £55m in the financial year ending 30 June 2021.

Good news all round then, except for those receiving their P45s.

Management changes

Chief operating officer Claudio Veritiero has been coshed. Friday’s statement told us he’s leaving the company with immediate effect, his responsibilities being assumed by the chief executive and chief financial officer.

Veritiero’s departure means every executive director in Kier’s boardroom when chairman Philip Cox arrived in 2017 has now been ousted. Cox himself will leave once the company’s found a replacement.

However, an investor revolt at the AGM, with a 54% vote against the firm’s executive pay policy, was due not only to anger at the ‘reward for failure’ of the old guard, but also criticism of the remuneration packages of new chief executive Andrew Davies and new chief financial officer Simon Kesterton. Clearly, there’s ongoing disaffection with the company among major shareholders.

The D-word

However, my number one concern with Kier is its debt. Net debt at the last financial year-end stood at £167m (despite earlier management guidance of net cash), and average month-end net debt over the year was £422m. Put this against year-end negative net tangible assets of £247m and the company’s current market capitalisation of £145m, and I think I’m right to see debt as a huge concern.

Furthermore, lenders are said to be running scared about the company’s future, with the Sunday Telegraph reporting a couple of weeks ago that HSBC and others are trying to offload their Kier loans to distressed debt specialists for as little as 70p in the pound.

This is ominous for shareholders, because when lenders (who rank above shareholders) are pricing debt at a hefty discount, it raises serious doubts about the value of equity. Friday’s trading statement, which revealed no tangible progress on the sale of assets Kier has earmarked for (debt-reducing) disposal, will have done nothing to reassure lenders.

The situation at Kier may attract speculative share traders. Personally, I see it as far too risky. I’d avoid the stock with the proverbial implement for manoeuvring canal boats.

The post The Kier share price has fallen 90% in a year. Time to buy? appeared first on The Motley Fool UK.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

High hopes

Philip Cox was full of optimism when he arrived as the company’s new chairman in 2017. Commenting on his appointment, he said: “There are clear opportunities for Kier in each of its market sectors and I am excited about the prospect of working with the management team to grow the business.”

Two years on, four of the five executive directors have been replaced, and the company has announced it’s selling or discontinuing its businesses in half the market sectors in which it operates. Last month, Cox informed the board he will step down once a successor has been appointed.

Between the announcements of his arrival and departure, Kier’s shares lost 91% of their value. What went wrong? And can the new management team put things right?

Bears smell blood

Following the liquidation of Carillion in January 2018, short positions in Kier increased rapidly though the spring and summer. Hedge funds reckoned Kier had many of the same issues, and positioned themselves to profit if its share price collapsed.

Kuvari Partners was one such fund, and the Financial Times reported on its short thesis on 28 November 2018. Kuvari suggested Kier was not only a low-margin business and vulnerable to economic cyclicality, but also used ‘aggressive’ accounting methods.

It reckoned the company’s presentation of adjusted cash flow was misleading. This showed a cumulative inflow of £95m over the five years to 2018. Kuvari’s calculations put the true figure as an outflow of £209m. It also reckoned that taking into account Kier’s ‘hidden leverage’, its net debt-to-EBITDA ratio was a whopping 6.8 times. And that it desperately needed to raise cash.

Two days after the FT reported on Kuvari’s short thesis, Kier announced a £264m rights issue.

No desire to gamble

Despite the rights issue, year-end net debt this year of £167m was only £19m lower than last year, and disastrously below management’s guidance earlier in the year of a net cash position. Furthermore, average month-end net debt after the rights issue was no lower than last year’s £375m.

Meanwhile, we’re another year closer to the expiry of the majority of Kier’s banking facilities in 2022. The company has previously warned that “a number of lenders have indicated an intention to reduce their exposure to the construction and related sectors,” which could adversely impact its ability to renew or find alternative banking facilities.

Management has its work cut out, and there are many uncertainties and risks for investors. How much will the company manage to raise from asset sales? What will the costs be for discontinuing businesses? How quickly can management reverse last year’s £83m net cash outflow from operating activities? How vulnerable would the company be in the event of a post-Brexit recession? What will happen when it comes to negotiating the renewal of its banking facilities?

It’s possible the current Kier share price could turn out to be the buy of the decade … or another disaster in this troubled sector. With very little visibility on the company’s near-term and longer-term outlook, and having no desire to gamble on it, I’m happy to avoid the stock.

The post Is the Kier share price the buy of the decade? appeared first on The Motley Fool UK.

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• Down 45% in 5 years, this UK stock now offers a stunning 11% dividend yield!

G A Chester 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.

While this is likely to be a challenging period for such investors, I think it is worth persisting with the stock market. Even though it can cause huge disappointment in the short run, over the long term it has the potential to deliver high returns that may lead to an improved financial outlook for investors.

Return prospects

Although the main UK index, the FTSE 100, may be trading less than 10% higher than it did almost 20 years ago, its long-term growth potential remains high. At the present time, for example, it appears to be undervalued versus its past price levels. It currently has a dividend yield of around 4.5%, with its income return having been at or above this level only for short periods in the past. Often those periods have coincided with a highly uncertain outlook for the world economy, which could mean that the index offers a wide margin of safety for new investors.

Moreover, the index was grossly overvalued two decades ago. In fact, it had risen at an annualised rate of around 13% in its first 16 years of existence (between the start of 1984 and the end of 1999). This led to high valuations across a wide range of companies at a time when the tech bubble was growing rapidly. Due to its overvaluation two decades ago, it is perhaps unsurprising that it has recorded more modest returns in subsequent years.

Growth potential

Looking ahead, the stock market could experience heightened volatility. With the global trade war continuing to grow in terms of its potential threat to GDP growth and other challenges such as Brexit being ahead, investors in the stock market may not generate significant returns in the short run.

Furthermore, there will always be stocks within the FTSE All-Share that produce disappointing financial performance. Kier and Thomas Cook are two recent examples of FTSE All-Share stocks that have delivered significant declines in their valuations, but they will not be the last companies to disappoint investors.

However, from a long-term perspective, shares continue to offer appealing returns. Emerging markets such as China and India are expected to grow rapidly, with them having the potential to catalyse the wider global growth outlook. And with the UK’s main index, the FTSE 100, appearing to offer a wide margin of safety, building a diverse range of stocks could lead to an improving financial outlook for investors.

As such, I think that now is not the time to give up on the stock market following the disappointment with Kier and Thomas Cook. In fact, it could be a good time to invest in high-quality companies that trade on low valuations.

The post Kier and Thomas Cook shares: why I think investors should persist with the stock market appeared first on The Motley Fool UK.

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• Here’s how much an investor needs in Lloyds shares to earn a £125 monthly income
• Down 45% in 5 years, this UK stock now offers a stunning 11% dividend yield!

Peter Stephens 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.

Today, I’ll discuss the prospects for Kier (LSE: KIE) and Thomas Cook (LSE: TCG) and give my opinion on whether they’re now bargain picks, or stocks to avoid at all costs.

Kier-illion?

Kier’s shares were trading at over 1,000p little more than a year ago, but have recently hit lows of not much above 100p. A rights issue (at 409p) just over six months ago was supposed to strengthen the company’s balance sheet to the extent it would report net cash at its financial year-end of 30 June. But that won’t now be the case.

Group trading has been below expectations, and management says it will report net debt at 30 June, and average month-end net debt over the year of between £420m and £450m. As a result, new chief executive Andrew Davies pulled forward the conclusions of a strategic review that had been scheduled for announcement on 31 July.

The company now plans to dispose of (in what will effectively be a fire sale) an array of non-core assets. It said it expects a “material reduction” in “overall indebtedness” during the next 12 months, but gave no real guidance on when debt will be under control.

Despite the shares being “cheaper” than ever, short selling of the stock — sophisticated hedge funds positioning themselves to profit from a falling share price — has only increased in recent days.

I think Kier’s future, possibly even its survival (recall the collapse of sector peer Carillion), is so uncertain that the downside risk for investors today is simply too big. It’s a stock to avoid in my book.

Thomas Cooked?

Thomas Cook is another company where debt is dangerously high (£1,247m at the 31 March half-year-end) — and moving the wrong way. In an article on 30 May, I suggested cashing out of the shares at 18p might be a wise move. Has news in June — and a decline in the share price to 14.5p — changed my view?

On 10 June, the company announced it was in discussions about a potential offer for its tour operator business, following receipt of a preliminary approach from Fosun International. This added to a number of previous expressions of interest in various parts of Cook’s business.

However, having talked of maximising value for “shareholders” in previous instances, Cook’s latest announcement referred to “maximising value for all its stakeholders.” (My bold.) Stakeholders include debt holders, and the change of terminology is ominous, because we invariably find it in cases of major capital restructuring, such as a debt-for-equity swap, that leave shareholders with little or no value.

Also ominous was a recent report that one of Cook’s bank lenders is trying to offload the unsecured element of its loan at just 50p in the pound. Meanwhile, the company’s bonds continue to trade at less than 40p in the pound, and short positions in the shares continue to rise.

I think this all adds up to a grim outlook for shareholders (who rank below debt holders) on any break-up or restructuring of the group. I’ll continue to avoid the stock.

The post Could Kier and Thomas Cook shares be bargains of the year? appeared first on The Motley Fool UK.

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• 3,703 Legal & General shares pay £822 yearly passive income
• 5 years ago, £10,000 bought 9,827 Rolls-Royce shares. But how many would it buy now?
• No savings at 30? How investing £5 a day in an ISA could target a stunning second income of £40,208 a year
• Here’s how much an investor needs in Lloyds shares to earn a £125 monthly income
• Down 45% in 5 years, this UK stock now offers a stunning 11% dividend yield!

G A Chester 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.

Ordinarily, such a low earnings rating and high yield would indicate some major underlying problem with the business, or serious risk, like a high level of debt. This was the case with FTSE 250 outsourcer and builder Kier (LSE: KIE), which required a £250m rescue rights issue late last year. And slashed its dividend in its half-year results announced today.

However, in the case of Taylor Wimpey (and fellow volume housebuilders Persimmon and Barratt), business is booming and balance sheets are awash with cash. Nevertheless, I see a number of warning lights flashing red for the builders, and Kier’s position is still precarious, despite its fundraising.

Debacle

I warned readers last November that Kier’s high level of debt could be a hindrance to it winning new contracts. Its balance-sheet-bolstering rights issue was announced 11 days later, and was poorly supported by shareholders. This debacle was followed by the departure of under-pressure chief executive Haydn Mursell, and a further fiasco in which net debt figures were significantly upped.

Work cut out

In today’s results, Kier reported a £35.5m loss before tax, and a fairly meagre £39m profit on an ‘underlying’ basis, on revenue of £2.1bn. Despite the rights issue, net debt at 31 December stood at £180.5m and average month-end net debt over the six-month period was £430m.

The company said it’s maintaining its underlying expectations for the year to 30 June, including a net cash position at the period end, with “the full-year results being weighted towards the second-half of the financial year.” This while also noting“current political and economic uncertainty” and “some volume pressures in the highways, utilities and housing maintenance markets.”

New chief executive Andrew Davies takes up his position on 15 April. I think he’ll have his work cut out, and I’m happy to avoid the stock at this stage of proceedings.

Boom and bust

Last month, Taylor Wimpey reported “another strong year,” and “a very positive start to 2019.” Currently, demand for new homes is underpinned by high employment, low interest rates, competitive mortgage deals and the Help to Buy scheme. In fact, just about everything that bears on housebuilders’ profits is favourable right now.

Taylor Wimpey posted record revenue for 2018, with profit margins and return on equity at terrific levels. The trouble is, these characteristics, together with the undemanding earnings rating and high dividend yield, are typically found at the top of the boom-and-bust housing cycle.

The boom could have further to run — particularly with the market distortion of Help to Buy — but unless “it’s different this time,” a bust will follow the boom. Taylor Wimpey’s aforementioned 9.9% dividend yield includes a good-times special. It reckons it’ll be able to maintain its ordinary dividend (current yield of 4.1%) “during a ‘normal’ downturn” of the housing cycle. But I’m not convinced it would be sufficient compensation for the likely magnitude of the fall the shares.

The current valuation is 1.9 times tangible net asset value, while housebuilders tend to go to a sub-1 multiple at the bottom of the cycle — sub-100p for Taylor Wimpey, as things stand. I don’t see the risk/reward balance as appealing at this stage of the cycle, so I’m continuing to avoid the stock.

The post Warning! I think this FTSE 100 stock’s 9.9% dividend yield is fool’s gold appeared first on The Motley Fool UK.

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G A Chester 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.

Long and short of it

The table below shows forecast price-to-earnings (P/E) ratios and dividend yields for the three companies. It also shows what mainstream City brokers are recommending to their clients (source: WebFG), as well as a summary of current short positions in the stocks — that’s to say, bets on their share prices falling — held by sophisticated hedge funds (source: UKShortTracker).

As you can see, P/Es are super-low across the board and dividend yields are huge. No City brokers are negative on the stocks — indeed, a good number are positive — but there are hedge funds holding significant short positions. In my experience, it pays to be extra cautious when assessing stocks with high levels of short interest.

Kier’s hardiness questionable

Kier is currently the most heavily shorted stock on the London market. I agree with my colleague Roland Head that its net debt is too high for a low-margin business. Furthermore, since the collapse of sector peer Carillion, awarders of contracts are paying closer attention to the financial strength of bidders. Kier’s current level of debt could be a hindrance to winning new contracts, in my opinion.

Debt isn’t the only reason for the large short position here. Kier sports a number of other possible ‘red flags’ that Carillion had displayed, including reverse factoring, joint venture usage, and myriad annual exceptional items. Add these accounting complexities to the high debt and this is a stock I’m happy to avoid.

Crest of wave passed

Crest Nicholson issued a profit warning last month, saying the market for new homes in London, and at higher price points in the south of England, had been tougher than anticipated. I’ve been banging on for a year about how low P/Es and high yields, combined with high margins and high price-to-tangible book values (P/TBVs), are top-of-the-cycle features of the boom-and-bust house-building industry.

I’m interested in house-building stocks when the P/TBV is at, or below, one. Crest Nicholson is getting there, but isn’t quite there yet, with its P/TBV having fallen to 1.1. As such, it’s a stock I’m still avoiding, but one I’m keeping a close eye on. I view a reduction in short positions since the profit warning and a recent big share purchase by the executive chairman as further signs we’re getting near-value territory.

Browned off

N Brown is transitioning to an online-only business but growth is being handicapped by falling offline sales, and the tough retail environment. Aside from seeing only the very strongest businesses in the retail sector as worthy of investment consideration, Brown’s reliance on revenue from charging customers high interest on paying by instalments, further weakens it as an investment candidate, in my eyes. Another negative is a recent profit-denting draft ruling in a VAT dispute the company is involved in with HMRC. This is a stock I’d avoid even if there were no short positions in it.

The post These 3 FTSE 250 stocks have slumped over 20%. Is it time to buy? appeared first on The Motley Fool UK.

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G A Chester 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.

Build a fortune

Construction play Kier Group (LSE: KIE) cheered the market with a bubbly set of results in Thursday business. The company advised that revenues galloped 32% between July and December, to £2.1bn, a result that drove pre-tax profit 19% higher to £44.2m. And a chunky £9bn order book across its Property and Residential divisions bolsters Kier’s chances of achieving its ‘Vision 2020’ programme, under which it plans to double profits by the close of the decade.

The City expects Kier to enjoy an 8% earnings bump in the year to June 2016, resulting in a P/E multiple of just 12.5 times. And this figure topples to an exceptional 10.7 times for 2017 thanks to predictions of a 16% bottom-lime bounce.

I fully expect the strength of Britain’s construction sector, not to mention Kier’s aggressive expansion strategy and knack of grinding out contract wins, to keep driving earnings skywards in the years ahead.

A perfect fit

Fashion play Ted Baker (LSE: TED) also gave investors cause for celebration during today’s session. The clothing giant advised that profit before tax leapt 20% in the 12 months to January 2016, to £58.7m, underpinned by a stunning 18% sales increase, to £456.2m.

Ted Baker’s breakneck expansion strategy is clearly paying off handsomely — the company now boasts 448 outlets across Europe, North America and Asia. And plans to open new stores in France, the US, Canada and China in the current year, as well as a host of concessions across the globe, are likely to underpin further exceptional sales growth.

The number crunchers expect Ted Baker to ratchet up an 8% earnings rise in the current fiscal year, creating an elevated P/E multiple of 25.9 times. But this readout drops to 22.3 times for 2018 due to forecasts of an extra 15% earnings rise.

And I expect this figure to keep on toppling, as surging demand for Ted Baker’s terrific togs drives the top line higher.

In rude health

Hospital builder Spire Healthcare (LSE: SPI) also made the financial pages on Thursday with a robust trading update. The company punched pre-tax profit of £73.6m in 2015, it advised, swinging from a loss of £7m in the prior year.

Spire saw revenues edge 3.4% last year, to £884.8m, the company reporting a 3.7% increase in ‘in-patient’ and ‘daycase’ admissions during the period, to 270,000 cases. And I believe Spire’s facility construction programme should facilitate further sales growth in the coming years amid expanding healthcare demand.

Spire is not expected to produce electrifying earnings growth in the near future, however. A 3% decline is currently pencilled in for 2016, although the business is expected to get rolling again from next year — a 6% bottom-line advance is currently forecast.

These figures create earnings multiples of 19.2 times and 18.1 times correspondingly. While these figures may not immediately bowl over value hunters, I believe Spire’s strong position in a growing market makes the company a terrific long-term earnings selection, even at current prices.

The post Why Kier Group plc, Ted Baker plc & Spire Healthcare Group PLC Are Stunning Growth Picks appeared first on The Motley Fool UK.

More reading

• 3,703 Legal & General shares pay £822 yearly passive income
• 5 years ago, £10,000 bought 9,827 Rolls-Royce shares. But how many would it buy now?
• No savings at 30? How investing £5 a day in an ISA could target a stunning second income of £40,208 a year
• Here’s how much an investor needs in Lloyds shares to earn a £125 monthly income
• Down 45% in 5 years, this UK stock now offers a stunning 11% dividend yield!

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.