Clearly, investor sentiment has been negatively impacted by the news. In the short run, there is the potential for further declines as the market digests it all. However, in the long run is the company a stock to avoid, or a potential turnaround play?

Long-term potential

While the last year has seen the company’s share price decline by over 90%, things could improve for the stock in the long run. Major changes are ongoing at the business right now, with a new CEO likely to implement a refreshed strategy. This could involve a refocus on core operations, with an asset disposal programme already under way. Alongside an efficiency programme, this could improve the long-term prospects for the business and help to create stronger financial performance in future years.

Short-term difficulties

However, in the short run there appear to be major challenges ahead. The end of April could be a key period for the business as it is when it must meet the banking covenant tests which were deferred from the end of 2017. If they fail to be met then it may mean that a fundraising is required in order to boost the financial strength of the firm. While this has the potential to be successful, there is no guarantee.

In the meantime, the trading conditions for the company remain tough. And with the FCA investigation now ongoing, investor sentiment could worsen in the near term. But with the stock now trading on such a low valuation, its potential rewards remain high. Therefore, for investors who can cope with the potential for loss and for high volatility, Carillion could still be an attractive buy.

Successful comeback

Of course, there are other support services companies that have been the subject of FCA investigations. Sector peer Mitie (LSE: MTO) announced in August that the FCA was to investigate the timing and content of a profit warning. While this may have held back investor sentiment to some degree in the months following the announcement, the stock could have turnaround potential.

Mitie is now expected to report a rise in its bottom line of 34% in the next financial year. Under new leadership, it seems to have put together a strategy which could allow it to deliver sustained profit growth over the long run. And with its shares having declined in recent months, it now trades on a price-to-earnings growth (PEG) ratio of just 0.3. This suggests that it may offer a relatively enticing risk/reward ratio.

Certainly, Mitie is a relatively high-risk stock. It continues to face an uncertain future. But for long-term investors who are comfortable with a volatile and challenging outlook, the rewards could be high.

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Peter Stephens owns shares in Carillion. 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.

Its longstanding chief executive and finance director had both departed and I expected major kitchen-sinking from the new chief executive in the form of impairments, a suspension of the dividend and a discounted fundraising at some point to shore up the balance sheet. In short, a pretty grim outlook for the company whose shares were then trading at 221p.

Up and down

To my consternation, the shares began to soar. Full-year results in June saw the dividend suspended but impairments were far less than I was anticipating and net debt had fallen to £147m from £178m. The shares reached a high of almost 300p in the wake of the results. So much for my ‘sell’ rating at 221p!

However, while short-term traders may have profited, the shares soon began to fall back and after the company released its half-year results earlier this week, they’re down to 206p, as I’m writing. Net debt was back up, to £173m, and there’s also £60m debt due to be repaid in December. Nevertheless, the board declared a small interim dividend (gross cost £0.5m).

I continue to think we’ll see further impairments in due course, including to goodwill, of which there’s £274m on the balance sheet, compared with net assets of less than £100m. Goodwill of £107m was written down to zero for its disposed-of healthcare business and there’s been a £15m writedown on its held-for-sale property management arm. But no writedowns for continuing operations.

I also still feel a dilutive fundraising is likely at some point. If so, 12-month forward earnings-per-share (EPS) forecasts would have to be lowered, making a nonsense of a current price-to-earnings (P/E) ratio of 11. Personally, I continue to rate the stock a ‘sell’, although investors should also consider the bull case.

Turning point

In contrast, I’m convinced FTSE 100 pharma giant AstraZeneca (LSE: AZN) has a terrific outlook and I rate the stock — trading at under 5,000p, as I’m writing — a ‘buy’. This despite EPS having fallen a cumulative 40% since 2011 and a further 20% drop forecast by City analysts this year.

The company is weathering a period of patent expiries and generic competition but the fall in EPS is forecast to bottom out in 2018. The business has been restructured and reinvigorated and my confidence in the medium-to-long-term outlook for earnings growth is bolstered by Q3 results from the company earlier this month.

Of particular note, management advised that the impact from patent expiries is receding. Meanwhile, new drugs are coming through fast. There were seven regulatory approvals during the period and other positive developments in the late-stage pipeline. Further significant news flow is expected during 2018.

A P/E of 18 may not sound cheap but this will drop rapidly if, as I anticipate, the company meets forecasts of accelerating EPS growth of 15% in 2019 and 20% in 2020. With the board having also maintained the dividend through the doldrums, giving a nice running yield of 4.2% at current exchange rates, the shares look very buyable to me.

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

Multinational, multi-sector prospects

Shares of AIM-listed Optibiotix Health (LSE: OPTI) are trading down about 3% today after a decent run-up in advance of its half-year results, which were released this morning.

With a pipeline of patent-protected products, which modulate the human microbiome to tackle such things as obesity, high cholesterol and diabetes, Optibiotix has stimulated interest from national and multinational companies in both consumer health and pharmaceutical markets. Indeed, it has already penned agreements with, among others, Tata Chemicals, one of India’s leading suppliers of food ingredients and HLH BioPharma Vertriebs, one of Europe’s leading suppliers of probiotics to the pharmacy market.

Commercial take-off

Today’s results for the six months ended 31 May showed revenue of a mere £75,000, compared with cost of sales of £35,000 and administrative expenses of over £1m. Nevertheless, the company reported a statutory profit of £3.2m. This was due to it de-merging and giving a separate AIM listing to its majority-owned skincare subsidiary, Skinbiotherapeutics, leading to an uplift in the value of its investment.

While the income statement showed a profit and the balance sheet a nice increase in net assets, the cash flow statement recorded cash burn of £1.2m. Nevertheless, Optibiotix retains cash of £1.9m, which it says is “sufficient to cover the delivery of existing development and commercial plans.”

With the company targeting a number of “large markets (>£100m) where there are high growth opportunities (CAGR >10%) and a large unmet need” this £54m cap company — at a current share price of 68.5p — could grow rapidly as current and future commercial deals take off. The shares look very buyable to me as a higher-risk-but-potential-very-high-reward proposition.

All not as it seemed

Until recently, many investors viewed support services firm Mitie (LSE: MTO) as a steady growth and reliable dividend stock. Earnings growth had supported annual dividend increases that had taken the payout from 1p a share in 2000 to 12.1p a share last year.

However, all was not as it seemed, with the company increasingly betraying signs of aggressive accounting — and perhaps worse — as I explained when I tagged it The one FTSE 250 stock I’d sell ASAP in May. As this has all begun to unravel, I was expecting some serious ‘kitchen-sinking’ in its annual results on 12 June and a discounted fundraising to shore up the balance sheet at some point, well below the share price of 211p at the time I was writing.

Can of worms

The kitchen-sinking didn’t happen to the extent I expected and, while the dividend was suspended, there’s so far been no fundraising. The shares are currently trading at 267p but I maintain my ‘sell’ stance on the basis of my conviction that there are more worms to come out of the can.

My conviction is only strengthened by Mitie announcing yesterday that the Financial Conduct Authority has launched an investigation into the “timeliness” of its profit warning last September and, more importantly, into “the manner of preparation and content of the company’s financial information, position and results” for its last financial year.

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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.

Uncertain outlook

Mitie released news on Tuesday. It stated that the company was informed on 25 August that the FCA has commenced an investigation into the company. It is connected to the timeliness of a profit warning announced by the company on 19 September 2016, as well as the manner of preparation and content of the company’s financial information, position and results for the period ending 31 March 2016. Mitie does not expect to update the market on the progress of the investigation until it is completed, and is cooperating fully with the FCA.

Although the company’s share price did not fall following the news, it nevertheless creates further uncertainty regarding its future. It has a new management team and a new strategy which have already made its outlook more difficult to predict. With the FCA investigation having the potential to deliver more difficult news flow over the medium term, it could lead to investors demanding a wider margin of safety. This may translate into relatively disappointing share price performance in future.

An improving business

While Mitie’s new strategy could deliver strong earnings growth, it seems to lack the mix of stability and upside potential of other stocks such as GlaxoSmithKline. The latter offers a diversified business model, since it operates in consumer goods, pharmaceuticals and vaccines. This reduces its overall risk profile and provides a degree of stability which is not always present among pureplay pharmaceutical stocks which are reliant on the boom/bust patent cycle.

As well as its stability, GlaxoSmithKline also has strong growth potential. It has an excellent pipeline of potential treatments which could catalyse its earnings performance in future years. It also has exposure to emerging markets through its consumer goods arm, where demand for a range of consumer products is forecast to increase in future years.

With GlaxoSmithKline trading on a price-to-earnings (P/E) ratio of 13.5, it seems to offer excellent value for money given its risk/reward profile. In fact, its rating is lower than that of Mitie, which now has a P/E of 15.2 after its recent share price gain. Due to it having a lower valuation, more robust business model and significant growth potential in the long run, GlaxoSmithKline seems to be a stronger investment opportunity than Mitie at the present time.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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

Looking ahead, more uncertainty could lie ahead for the firm and here are three reasons why I remain bearish the stock.

Dilution

The first reason I’m staying away from Carillion’s shares right now is the risk of being diluted from a need to raise funds to support a restructuring.

The company wallows in £695m of net debt — that’s up by 18% since December, and set to get even worse as a result of a deterioration in cash flows on its construction contracts, combined with higher working capital outflow going forward.

As such, some analysts reckon Carillion might need to raise at much as £500m via a rights issue or a debt-for-equity swap. By all accounts, that would represent a massive dilution for existing shareholders as the company’s market capitalisation currently stands at £244m.

Counterparty risk

Looking ahead, Carillion could struggle to keep contractors onboard and win new contracts due to concerns about higher counterparty risk, given the company’s overextended balance sheet and delays to payments on public-private partnership contracts.

Already, Oxfordshire County Council said it would end in September a 10-year deal with the company to build schools and supply property management services, a contract reportedly worth around £500m.

On a more positive note though, Carillion did recently win some lucrative work to build and design part of the HS2 rail project as part of a joint venture with Kier and Eiffage.

Further writedowns

Carillion has so far made provisions for a £845m writedown, but further writedowns are possible as a new management team takes a thorough re-examination of its legacy construction contracts. As many of these contracts are typically long term, there’s a great deal of uncertainty over the eventual profitability of these construction prospects, and as such, there’s huge potential for further revisions on its provisions.

With these three risks, I’m happy sitting safely on the sidelines.

Mitie

Meanwhile, rival outsourcer Mitie (LSE: MTO) may be a better pick. After announcing its own profit warning around a year ago, it now has in place a new management team with an ambitious turnaround plan.

CEO Phil Bentley is betting heavily on technology to drive a recovery in the outsourcer’s financial performance. It has invested in a major transformation programme to improve its customer proposition and is already halfway through its £45m cost-saving programme.

While uncertainties remain, I reckon there’s considerable upside potential as the benefits of its investment programme could well feed into top-line growth and margin improvement. As such, Mitie seems to me like a lower-risk option at the moment.

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Jack Tang has no position in any 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.

Imploding balance sheet

Ruby McGregor-Smith became Mitie’s CEO at the end of March 2007 and formed a formidable executive partnership with finance director Suzanne Baxter.

The table below shows some features of the balance sheet at the time Ms McGregor-Smith inherited it and at the last two reporting dates.

As you can see, net assets grew impressively from £204m to £415m between March 2007 and March 2016. However, this was driven by a large increase in intangible assets — mainly goodwill from Mitie’s multiple acquisitions.

At 31 March 2016, the group’s healthcare division accounted for £107m of the total goodwill of £465m. Just six months later — in Ms McGregor-Smith’s last results before stepping down — the  healthcare division goodwill was entirely written-off. Her successor, Phil Bentley, sold the business for £2.

The write-off and an increase in borrowings were largely responsible for net assets plunging between March and September 2016. In fact, NAV per share of 63p was lower when Ms McGregor-Smith departed than when she arrived (65p). And the balance sheet was considerably weaker: goodwill represented 160% of net assets compared with 73% in 2007, while net debt had ballooned to £232m (103% gearing) from net cash 10 years ago.

I suspect there’ll be further goodwill writedowns when Mitie releases its annual results later this month, with new boss Mr Bentley likely to do some serious ‘kitchen-sinking’. And I wouldn’t be surprised if there’s a discounted fundraising at some point — well below the current share price of 211p — to shore up the balance sheet.

It gets worse

Mitie (and its peers) have often been accused of opaque and possibly aggressive accounting, with much justification, in my opinion. There are a number of things in Mitie’s accounts that concern me, including the level of accrued income. This is revenue that has been recognised but not billed.

The table below shows accrued income as a percentage of revenue for Mitie and its peers.

Mitie’s accrued income as a percentage of its revenue has been increasing every year and, worryingly, is dramatically higher than its peers. Another disconcerting aspect to this is that at various points in time the four companies switched from reporting ‘prepayments and accrued income’ in one line to reporting them in separate lines.

Capita, Serco and Interserve did this in 2010, 2014 and 2015, respectively. Their prior year comparative numbers are consistent with those in their previous annual reports. However, in Mitie’s case (2015) the numbers don’t tally. There’s a £42.2m discrepancy. The company gives no explanation for it. It takes a nerdish comparison and reworking of receivables in the two annual reports to figure out that in 2015 Mitie retrospectively reclassified at least £13.3m and probably £42.2m as accrued income in 2014.

I’m expecting a writedown of accrued income in the upcoming results. And other nasties. Finance director Ms Baxter has followed Ms McGregor-Smith out of the door and new boss Mr Bentley has brought in KPMG to lead an independent review of the accounts.

These are just some of the reasons why I rate the shares a sell.

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Impressive performance

The company in question is Smart Metering Systems (LSE: SMS). It installs, owns and manages utility metering assets, and recorded a rise in the total number of assets under management of 28% in the 2016 financial year. This helped to push its total annualised recurring income 20% higher, while the company also signed contracts for the installation and ownership of gas and electricity domestic smart meters with eight energy suppliers.

As a result of its positive performance, it expects 2016’s financial numbers to be in line with expectations. There’s further growth potential from its relatively new status as a fully integrated service provider. This should help to increase its appeal to customers. Its delivery of year-on-year double-digit growth across all of its key metrics provides evidence of its sound strategy and growth plan.

Outlook

In 2017, Smart Metering Systems is forecast to record a rise in its bottom line of 18%, followed by further growth of 54% in 2018. Although it currently trades on a price-to-earnings (P/E) ratio of 28.8, its exceptionally strong earnings forecasts seem to justify a relatively high rating. For example, if it maintains its current rating at the end of this year, its shares will be 18% higher than they are today. Furthermore, it would trade on a price-to-earnings growth (PEG) ratio of just 0.5, which would indicate more capital gains could lie ahead.

Looking beyond 2018, it seems likely that the company will be able to continue to post double-digit earnings growth. After all, in the last four years it has done so in every year. Therefore, it would be unsurprising for it to maintain its current rating at the end of 2018, which could lead to gains well in excess of 50% by 2019.

A challenging sector

Such a bright future contrasts with many of its support services peers, such as facilities management company Mitie (LSE: MTO), which are enduring difficult periods. In Mitie’s case, its new management team has a major turnaround job ahead, with recent profit warnings and the decision to exit from the healthcare business likely to cause a degree of uncertainty in the short run.

Mitie is expected to record a fall in its bottom line of 47% in the current financial year. However, it would be unsurprising for this figure to be downgraded. Part of the difficulty it faces is a potential slowdown in the UK at a time when it’s reorganising its business. Therefore, Smart Metering Systems seems to be a far more attractive purchase at the present time.

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

How the Mitie has fallen

Outsourcer Mitie (LSE: MTO) issued a profit warning in September, another with its half-year results in November, and a third in a trading update earlier this month.

Chief executive Ruby McGregor-Smith departed shortly after delivering the half-year report, and the departure of finance director Suzanne Baxter was announced on the same day as new chief executive Phil Bentley delivered the third profit warning.

However, despite the hit to this year’s financials and boardroom upheaval, the consensus among City analysts is for a significant earnings recovery for the year to March 2018. And with Mitie’s shares at 200p, over 30% down from their 52-week high, the prospective P/E is 11.5 — well below the FTSE 250 average of around 18.

Significant downside risk

I think there’s a high risk of Mitie’s earnings forecasts being downgraded, but the balance sheet is perhaps an even bigger concern. Net assets at the half-year end stood at £225.3m (65p a share), which makes a share price of 200p look way too high to me. Worse still, strip out goodwill and other intangibles and you’re left with net assets of minus 56p a share.

On the day of the November half-year results, CEO-elect Bentley purchased £3.6m of shares, but I think he may rue his haste. Alongside the January profit warning, he announced that “the board is undertaking a balance sheet review” which will include consideration of the potential impact of new revenue recognition guidance under International Financial Reporting Standard 15.

I’ve long shared the suspicion of some analysts that Mitie accounts aggressively for revenue. With new-broom Bentley saying in January that he’s already identified £14m of charges after taking “a more conservative judgement on contractual positions”, I fear the balance sheet review could be a case of — in Warren Buffett’s words — “You see a cockroach in your kitchen; as the days go by, you meet his relatives”.

However, even if I were to dismiss the possibility of a balance sheet bloodbath, I’d be bearish on the shares purely on the basis of that huge premium to net assets as the balance sheet already stands.

Anaemic long-term performance

Marks & Spencer isn’t going through the acute stress that Mitie is suffering. Under new chief executive Steve Rowe, the FTSE 100 favourite is simply embarking on the latest in what seems like a never-ending cycle of attempted multi-year costly transformations to set the business on the path to long-term sustainable growth.

There have been more false dawns than I care to remember. The anaemic long-term performance of the company is well illustrated by the dividend’s compound annual growth rate of less than 2% over the last two decades.

Arguably, on a P/E of 11.7 and with a dividend yield of 5.4%, M&S is cheap at a current share price of 340p. However, I find it hard to dismiss the company’s uninspiring 20-year record.

And as to the next 20 years, I would ask: if you were going to design a retail operation to thrive in the coming decades, would it look like M&S?

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Brexit uncertainties

It seems that the old adage that profit warnings come in threes certainly rang true for the Bristol-based firm. Back in September it issued a trading update highlighting the fact that it had secured some important new contracts in its core Facilities Management business, where its long-term strategic positioning, order book and pipeline remained strong.

But at the same time, the company admitted that it continued to experience the effects of significant economic pressures, including lower UK growth rates, changes to labour legislation and further public sector budget constraints. And of course, the uncertainties around Brexit made their mark too. Management tried to reassure investors, saying it was taking strong action to counter the impact of these pressures by making operational changes and initiating cost efficiency programmes across the whole group.

Sell-off

The company also warned that full-year operating profits would now be materially lower than previously expected. That was a consequence of the continuing pressures experienced in the first half, and further one-off costs of organisational change associated with its cost efficiency programmes, totalling around £10m. But of course this wasn’t enough to stop investors panicking with the share price taking a hammering from the resulting sell-off. City analysts began to slash their earnings forecasts and a week later Mite had lost a third of its market value.

Investors who held their shares were perhaps hoping for more upbeat news in the company’s interim results in November, but unfortunately they were in for a disappointment as another profit warning hit the headlines. Operating profit fell by a massive 39.1% to just £35.4m, and the company saw a pre-tax loss of £100.4m, as it reiterated that full-year results would still fall short of expectations.

Third time unlucky

Earlier this week Mitie warned for a third time that earnings would be below forecasts as it struggled with client deferrals, delayed investment plans and an underperforming cleaning division. It now expects underlying operating profits for the full year to 31 March to be between £60m and £70m, again lower than previous forecasts.

Analysts expect a 30% fall in underlying profits for the full year, leaving the shares trading on a modest P/E rating of 12. Less risk-averse investors might see this as a potential recovery play, but I would suggest that those who want to sleep peacefully at night should wait for the outlook to improve. Existing shareholders might want to sit tight however, as the prospective 4.2% dividend yield is covered twice by earnings and should help to ease some of the pain.

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Bilaal Mohamed 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.

Intertek’s growth rate was boosted by the performance of its high margin Products division. It recorded sales growth of 22% at constant exchange rates and 33% when the positive currency translation from weaker sterling was factored-in. Furthermore, recent acquisitions contributed around £200m of additional revenues, while Intertek was able to grow organically too. For example, its Products division recorded a rise in sales of 5.5%, while its Trade division’s sales were 1% higher.

However, Intertek’s Resources division saw sales decline by 13%. This was due to the challenging operating environment within the industry, which is showing little sign of abating anytime soon. Encouragingly for Intertek’s investors, the Resources division contributes less than 10% of the company’s earnings and so further declines there are unlikely to severely impact on its medium-term growth outlook.

Intertek is on track to deliver on its 2016 target of robust revenue growth at constant exchange rates. Its margins are due to remain stable throughout the year and this is expected to yield bottom-line growth of 14%. Looking ahead to next year, Intertek’s earnings growth is expected to remain in double-digits, with growth of 11% forecast by the market. Despite such an upbeat growth outlook, Intertek trades on a price-to-earnings growth (PEG) ratio of just 1.6. This indicates that it offers a wide margin of safety, as well as significant capital growth prospects.

Tough times

This contrasts with sector peer Mitie (LSE: MTO). It issued a profit warning yesterday, as well as the writeoff of its healthcare assets. Mitie’s bottom line is expected to fall by 19% on an adjusted basis in the current year, which perhaps underplays the challenges which it faces.

Although the company has a new CEO who is likely to have the scope to make major changes to the business, Mitie will take time to deliver improved performance and could experience challenges during a turnaround period. Furthermore, the UK economy continues to face a high degree of uncertainty due in part to Brexit. This could make the task of improving Mitie’s performance a rather more difficult one.

As such, Intertek remains the superior buy of the two support services companies, with its low valuation, high growth rate and relatively consistent performance likely to prove popular among investors. And with the potential for further weakness in sterling as Brexit becomes a reality, Intertek seems to be well-placed to record upbeat performance and substantial capital gains.

The post Intertek Group plc shows more evidence of Brexit benefits as sales soar 18% appeared first on The Motley Fool UK.

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