In some cases, the losses are justified, but in others, they’re simply the result of weak market sentiment. During my research, I’ve uncovered three beaten-down shares forecast to double in price this year.

But the question is: are the forecasts accurate, or optimistic?

Future

Future‘s (LSE: FUTR) a tech firm that makes money from ads, affiliate links and subscriptions. In recent years, AI’s decimated its ad revenue model, dragging the shares down 72% in five years.

But that hasn’t deterred analysts. Out of eight rating the stock, six give it a Strong Buy, one a Buy and one a Hold. The most optimistic target is 1,875p, a 260% gain, and the most pessimistic, 733p — a 40% gain.

While that’s promising, whether it recovers depends on one of two things: either AI’s reeled in and ad markets stabilise, or the business implements an entirely new revenue strategy.

Encouragingly, the company converts a large chunk of its profits into free cash flow and carries manageable net debt, so the balance sheet looks solid. But whether it can turn its fortunes around remains to be seen.

Tullow Oil

Tullow Oil‘s an Africa‑focused oil producer with key assets in Ghana, Gabon and Côte d’Ivoire. The shares have been crushed to record lows after weak production updates, meaning any positive surprise on output, oil prices, or refinancing could move the price sharply.

If it hits targets and repairs its balance sheet, the shares are highly leveraged to better news. But debt of $1.2bn is a lot for a small company, so it risks needing to dilute shareholders if it doesn’t refinance successfully.

For me, the chance of a huge recovery here seems highly speculative — and comes with a lot of risk.

Essentra

Essentra‘s (LSE: ESNT) a specialist manufacturer of plastic and metal components that go into everyday industrial products. It might sound boring but it’s the kind of under-the radar business that has its fingers in many pies.

All six analysts I reviewed give it a Strong Buy, with even the most pessimistic forecast expecting a 61% gain. This optimism follows a restructuring that saw it exit non-core divisions, improving margins and cash flow.

As earnings improve, its price-to-earnings (P/E) ratio of 29 is expected to fall to around 13. Debt looks manageable, with leverage forecast around 1.4x EBITDA and improving, and the dividend slowly growing from a low base.

Even if it doesn’t double this year, it looks like a solid company that’s worth considering for long-term compounding. Still, it faces cyclical demand risk from its exposure to volatile end-markets like automotive, packaging, and consumer goods.

My verdict

For now, I think Future is a bit too uncertain to call, and Tullow Oil risks going in either direction. Of the three, Essentra looks like a solid option to consider. Even if it doesn’t make a 100% gain this year, I wouldn’t be surprised if it gets there in 2027.

The take away? Broker forecasts aren’t always based in reality. Always do a full assessment before diving into any stock — no matter the hype.

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Demand from easing monetary policy

The first one is Marshalls (LSE:MSLH). Last week, the stock hit the lowest level in a year at 229p. Currently, the share price is down 10% over the past year.

The UK-based landscaping and building products company has struggled in the past year, mostly due to subdued activity in the housing sector. As interest rates have stayed higher for longer, mortgage rates have done the same. This has made it tricky for people to buy houses. Further, with economic growth rather sluggish, some are feeling the pinch on finances and so are putting off home improvement projects. This remains a risk going forward.

However, February inflation data showed a fall from 3% the previous month to 2.8%. This could allow the Bank of England committee to start cutting the base rate faster if inflation keeps showing signs of falling. In turn, this should help to boost client demand for Marshalls.

Further, the latest annual results showed strong cost discipline as the management team focuses on efficiency. Net operating costs were down 10% versus the year before. So even if the company needs to contend with another slow year for revenue, lower costs can offset this impact.

I think the stock is now cheap as the price-to-book ratio is 0.93, the lowest level in a decade. This valuation metric can help investors to assess the market price relative to the book value.

A potential German boost

A second idea is Essentra (LSE:ESNT). Down 39% over the past year and currently at 52-week lows, this reflects a much larger move than Marshalls.

The industrial components manufacturer recently posted 2024 annual results showing a 4.4% decline in revenue to £302.4m. Adjusted operating profit fell 7.2% to £40.1m, with the management team citing “softening market conditions” for the overall fall. The business had been guiding towards lower results, hence the move lower in the stock price over several months.

With a price-to-earnings ratio of 12.4, it’s below the FTSE 250 average, making it potentially undervalued from that angle. Yet the other big factor relates to a possible surge in demand from European clients. Recently, Germany announced plans for a huge £420bn infrastructure investment package. With nearly half of firms revenue coming from the continent, it stands to win big if this fund takes off soon. I don’t believe this potential is reflected in the current share price, making it cheap in comparison.

Of course, one risk is that market conditions remain weak for longer than expected, causing the share price to fall further before recovering. This is true, but ultimately an investor should have a multi-year long-term investment horizon.

I think both value ideas are worth considering by investors at the moment.

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But as the Chinese proverb says: “Listen to all, pluck a feather from every passing goose, but follow no one absolutely.” In other words, consider everyone’s opinion but don’t blindly follow.

However, when 17 out of 17 ‘experts’ consider a stock to be a Buy, it’s sometimes difficult to take a different view.

A brief overview

Essentra says that it manufactures “essential components”. It currently makes over 3bn of them a year. These are small but critical parts – locks, washers and castors, to name a few — that are predominantly used in the manufacture of other products. Clearly, there’s significant demand for these things. The group has 14 manufacturing plants and a presence in 28 countries.

When the group’s 2024 results are finalised, they are likely to show revenue of just over £300m. And an adjusted profit before tax of £39.8m-£40.3m. This is in line with analysts’ expectations. The consensus forecast is for earnings per share (EPS) of 8.5p. If they are right, the stock’s trading on a reasonable 13.9 times historic earnings. This compares favourably to that of Diploma, the FTSE 100 company that operates in the same sector. It has a price-to-earnings ratio of nearly 30.

Is it really a growth stock?

It’s difficult to assess the historical performance of the business because it went through a major restructuring in 2022. The group sold its packaging and filters divisions. The proceeds were used to reduce borrowings and helped fund a special dividend.

But curiously, analysts are forecasting revenue in 2025 to be flat. And they are predicting a fall in EPS to 7.5p. This doesn’t feel like a growth stock to me and not one that I’d like to invest in. Of course, successful investing is all about taking a long-term view. But if this expected stagnation proves to be correct, in a year’s time, I suspect the share price will be lower than it is today. If I wanted to buy the stock, I reckon I could get it cheaper this time next year.

My verdict

As well as the anticipated lack of growth, I’m also concerned about the impact of President Trump’s threatened tariffs. In 2023, approximately 30% of the group’s revenue was generated from the United States. But it’s unclear to me whether the company’s manufacturing facilities inside the country can meet this demand. Bringing products into America that have been made overseas could soon attract higher import taxes.

Don’t get me wrong, I have nothing against the company. It looks to be well run and good at what it does. And its borrowings appear to be under control. Also, based on dividends paid over the past 12 months, the stock’s currently (10 March) yielding a reasonable 3.1%.

However, it doesn’t feel like it’s going places to me. Therefore, I don’t want to make an investment, despite what the analysts think.

The post Is it time to listen to the experts and consider buying this FTSE 250 growth stock? appeared first on The Motley Fool UK.

This has thrown up some exciting opportunities, which may not be suitable for all investors. Indeed, the companies I’ve outlined are turnaround opportunities. Unfortunately, more often than not, turnarounds fail to turn around. 

Still, despite the risks involved, I’d buy the three UK shares outlined below for my portfolio today as recovery plays. 

UK shares to buy now

The first stock is the manufacturer and supplier of plastic and foam packaging products, Essentra (LSE: ESNT). Shares in this company crumbled at the beginning of 2020 after it reported a near-80% decline in earnings for 2019. 

It’s now trying to put this lousy performance behind it. For the six months ended 30 June, revenues increased 7.5% on a like-for-like basis. Adjusted profit jumped 34%, and adjusted basic earnings per share rose nearly 40%. 

These figures tell me Essentra’s heading in the right direction. Nonetheless, the company has its work cut out to restore investor confidence. It’s also built up a considerable level of debt during the past 24 months, which could hold back recovery. 

Despite these headwinds, I’d buy the stock for my portfolio as Essentra moves forward and builds on its recent growth. 

Property regeneration

Another company I’d buy for my portfolio of UK shares is U and I (LSE: UAI). It’s clear the UK’s facing a structural property shortage, and one way to alleviate this could be to convert old properties. This is U and I’s specialism.

The company partners with local authorities and long-term capital providers to help regenerate city centre locations. 

Recently, the company has undertaken a review of its operations. Management has set out goals to reduce costs and increase output as well as reducing debt. I think these changes will put the business on a solid footing to capitalise on the growing demand for real estate development in the UK. 

That said, there’s no guarantee U and I’s restructuring will lead to profits for the group. Property development can be time-consuming and costly if the project isn’t managed correctly. If projects overrun significantly, the developer may encounter financial problems. 

However, I’d buy this company for my portfolio of UK shares, considering its recovery potential. 

Financial services

The final stock I’d acquire for a recovery portfolio is Metro Bank (LSE: MTRO). This company’s quite risky. In recent years, it’s struggled to earn a profit. And regulators have reprimanded it for failing to account for risk on its balance sheet correctly.

These challenges have really hurt its reputation among investors. However, from a customer point of view, Metro offers something most banks don’t. Its branch network and focus on customers over profit really stand out.

In a world where its competitors are slashing costs and removing branches from town centres, I think Metro has the edge. As such, I think if the business can get past the challenges outlined above, I think it could make a solid recovery play in my portfolio of UK shares. 

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Instead, I’d buy shares for my Stocks & Shares ISA because the dividends they pay can be reinvested and compounded in a similar way to how interest builds up in an ISA cash savings account.

Growing from an inflection point

I like the look of FTSE 250 manufacturing company Essentra (LSE: ESNT), which has a dividend yield running close to 5%. The share price has dropped by around 60% since its peak around four years ago but has been clawing its way back up through most of 2019, so far. But the weakness in the price is part of the reason for the high dividend yield, so I see it as an opportunity for investors.

There have been operational problems causing profits to dip. But in today’s half-year results report, chief executive Paul Forman said that in 2018, Essentra reached an “inflection point” and the firm is now set for sustainable growth in revenue and profits. On that theme, I find today’s figures to be encouraging.

Like-for-like revenue for the first half of the year to 30 June moved 1.3% higher than the equivalent period last year, and adjusted basic earnings per share at constant currency rates lifted by 7.5%. The directors maintained the interim dividend, which is reassuring given all the ongoing changes in the business.

Streamlining for growth

Indeed, the firm has been busy nipping and tucking operations, involving selling off underperforming divisions and acquiring new bolt-on businesses. But Essentra is no stranger to building growth via the acquisition route and has a long history of taking over other firms and businesses. From its roots as a manufacturer of filters for cigarettes, which it still produces, Essentra now claims to be a “leading global” provider of “essential” components and solutions with the three global divisions of Components, Packaging and Filters.

Today the firm reported “positive” momentum maintained in its Packaging division, which “returned to growth” in the last half of 2018. Paul Foreman explained in today’s report that the firm is in the process of “simplifying” operations. So far this year the subdivisions of Pipe protection, Extrusion, Speciality Tapes and Card Solutions have all been sold off. The Kilmarnock and Largo consumer packaging sites were also closed down at the end of last year. And on top of that, Essentra made a couple of acquisitions in the first six months of 2019.

I reckon simplification and increased focus is almost always a good thing in business, which makes me optimistic about the firm’s future prospects and its potential to recover and grow. At the recent share price of 408p, we can pick up a few of the shares on a forward-looking earnings multiple of just over 15 for 2020, which I’m inclined to do. Meanwhile, the anticipated dividend yield is around 5%, which looks attractive to me.

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My aim is to find stocks that are about to come back into favour with investors, triggering a major re-rating. Today I’m looking at two possible examples.

On the cusp of a turnaround?

My first stock is specialist manufacturer Essentra (LSE: ESNT). This FTSE 250 firm makes a range of products. These include cigarette filters, specialist packaging for the health and consumer sectors and plastic components for a wide range of applications.

Cigarette filters generated £34.8m of operating profit last year — about 40% of the group’s total operating profit. Most of the remaining profit came from the components division, which generated £58.7m from a wide range of industrial customers.

Essentra has lost more than 45% of its value since 2015, when the stock peaked at over 1,000p. But the board’s restructuring programme is now largely complete. Management guidance for the year ahead is for “a return to like-for-like revenue growth and margin expansion” in 2018.

I’m tempted by this 4.9% yield

Broker forecasts for 2018 suggest that the group’s adjusted earnings will rise by 11% to 24.5p per share, with a dividend of 20.8p per share. These figures put the stock on a forecast P/E of 17.5 with a prospective yield of 4.9%.

Although earnings cover for this dividend is slim, I don’t expect the payout to be cut now that profits are rising again. With profits expected to climb a further 15% in 2019, I’d rate Essentra as a buy at current levels.

This 7% yield may be worth buying

Although the long-term decline in cigarette smoking is old news, investors are starting to get concerned that next-generation vaping products may not be able to replace these lost sales.

UK number two Imperial Brands (LSE: IMB) has seen its share price fall by more than 30% over the last year. This stock now offers a forecast yield of 7.4%, but even that hasn’t been enough to tempt dividend investors back into the shares.

It’s certainly true that high yields such as this are often a sign that a dividend cut is likely. But sometimes the market just gets it wrong for a while.

I’m turning bullish

Imperial Brands’ key attraction for investors is its free cash flow. Historically this measure of surplus cash has broadly matched the group’s earnings, providing support for a very high level of dividend payouts.

Measured in this way, the group’s forecast dividend of 187p per share looks to me like it should be affordable. The only potential problem is the high level of debt.

Because management have focused on returning free cash flow to shareholders, most of the acquisitions made in recent years have been funded with borrowed cash. This left the group with net debt of £12.1bn at the end of September 2017. That’s nearly five times forecast profits for this year, which seems a little high to me.

Net debt fell by £800m last year. If this total continues to fall this year, then I suspect the dividend will be safe. We’ll find out more when the group publishes its half-year results on 9 May. Until then, I’m going to give the stock a cautious buy rating.

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But Friday’s release has given Essentra’s stock value a welcome shot in the arm, the stock last dealing 6% higher on the day.

The FTSE 250 business advised that pre-tax losses had narrowed to £5m in 2017 from £63m in the prior period.

Revenues rose 3% to £1.03bn, although this was thanks to favourable foreign currency movements — on a like-for-like basis they actually slipped 2% from 2016 levels. Having said that, the impact of hurricane activity in the US and Puerto Rico took a bite out of the top line in the period.

Commenting on the results, chief executive Paul Forman said: “I have previously expressed that restoring Essentra to sustainable, profitable growth is not a rapid journey, and we clearly have a lot of work still to do. However, together we have made great progress and tangible improvement in 2017, so we are already well on our way.”

Back to growth

With Essentra predicted to move back into a period of earnings expansion now — rises of 19% and 14% are forecast for 2018 and 2019 — brokers are also expecting the firm to start lifting dividends again too.

So after paying a 20.7p per share reward for each of the past three years, Essentra is anticipated to lift the dividend to 20.8p this year and again to 20.9p next year. Consequently investors can tap into tasty yields of 4.4% and 4.5% respectively.

That being said, cautious share pickers should recognise that these projections aren’t very well covered. Predicted dividends are covered just 1.3 to 1.4 times by predicted earnings through to the close of fiscal 2019, well below the widely-accepted security benchmark of 2 times and above.

Now Essentra is expecting to make further headway in 2018 and to finally report a return to like-for-like sales growth this year. Its progress is to be lauded, although it still has some way to go, and I therefore do not believe risk-averse investors should splash out on the stock today, particularly given its slightly-toppy forward P/E ratio of 17.9 times.

Bumper yields well protected

Indeed, I would be much happier to take my investment cash and to spend it on National Express Group (LSE: NEX) instead, and not just because of its far superior valuations.

The 8% earnings improvement predicted for 2018 leaves the bus operator dealing on a forward P/E multiple of just 11.5 times. An extra 4% profits rise is predicted for next year, and these bright projections lead to expectations of handsome dividend expansion.

The 13.51p per share reward of last year is anticipated to rise to 14.8p this year, and again to 15.8p in the following period. These figures yield a chunky 4.1% and 4.4% respectively.

To put the cherry on the cake, dividend coverage through to the end of 2019 stands at an impressive 2.1 times.

I am impressed by the splendid progress National Express continues to make in foreign climes, and with the company steadily expanding its international footprint I am convinced that both earnings and dividends should continue their trek higher.

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However, despite these two companies’ lacklustre capital performances I believe that, as income stocks, Essentra and Halfords should not be ignored. Here’s why. 

Growing dividend potential 

Today, Essentra announced that it had seen modest revenue growth in the third quarter after all divisions saw an improvement. This performance is impressive considering that the business has been subject to disruption by the hurricanes that have hit the US this year.

The division suffering from these storms the most is its Health & Personal Care Packaging division. Here, the division saw an “improved” revenue decline in the quarter, “notwithstanding the impact of Hurricane Maria on the two sites in Puerto Rico.“

Still, the overall trend is positive, and this was the first such period of like-for-like revenue growth since fourth quarter 2015, according to management. 

Essentra’s biggest strength is its cash generation. Even though growth has vanished over the past few years, cash flows have remained robust. During the past five years, the firm generated £341m in free cash flow from operations, excluding dividends. Of this total, £195m was distributed to investors. 

These figures indicate to me that, over the next few years, there’s scope for Essentra to double its dividend payout. Last year, the company generated £153m in cash from operations, spent £47m on CapEx, and returned £54m to shareholders. A similar performance this year leaves room to payout an extra £52m for a total of £56m. If growth returns in the years ahead, cash generation will undoubtedly improve – giving management more headroom for payout growth. 

At the time of writing the shares support a dividend yield of 3.9%. 

Unloved by the market 

Halfords currently supports a dividend yield of 5.5%, which indicates to me that the market doesn’t think much of the company. Nonetheless, the group has plenty of room to grow its dividend payout in the years ahead. 

Indeed right now, the payout is covered 1.7 times by earnings per share and analysts are already projecting a 3% payout hike next year. Looking at the group’s cash flows, it appears there’s scope of an even more significant distribution. 

2015 was the company’s most profitable year in the past five. For that year, the firm produced a pre-tax profit of £84m and a free cash flow of £120m. Dividends paid for the year cost £28m. If management can get the company back to this position, there’s plenty of headroom for additional payout increases. Even doubling the distribution, in this case, would be viable. With a gearing ratio of only 25% as well, Halfords’ balance sheet is strong enough to support higher distributions on an annual basis, or even a special payout. 

The shares are currently trading at an attractive valuation of 11.2 times forward earnings. 

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However, with the risks of Brexit causing the pound to weaken, and a monetary policy that is due to remain relatively loose, an even higher yield may be required to generate a worthwhile real income return. That’s where a company such as BP (LSE: BP) may prove useful for long-term income investors, with its 6.3% yield offering a 3.4% return above inflation at the present time.

A bright future

Clearly, BP lacks the diversity which the FTSE 100 offers. The index, by its very nature, includes a wide range of companies operating in a variety of sectors. Therefore, the chances of a sharp fall in dividends is reduced versus investing in a single stock such as BP. As such, for investors who are looking for a safer income stream over the long run, the index could be a good place to start.

However, BP could be a surprisingly strong performer in future years. The company has experienced a difficult period, with the oil spill in 2010 and oil price fall of the last few years placing its business under intense scrutiny and pressure. This has led to management changes and has also meant that the company’s asset base is perhaps smaller than it otherwise would have been had investment been higher.

Despite this, the company is expected to post impressive levels of profitability over the next couple of years. For example, its bottom line is due to rise by 33% in 2018 after it returns to profit in the current year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.5, which suggests that it offers excellent value for money at the present time.

Even though dividends are not due to be fully covered by profit next year, further improvement in its financial position could be ahead as the financial cost of the oil spill comes to a close. This could make BP a sustainable and highly appealing income stock for the long run.

More income potential

Also offering strong income prospects for the long term is plastic, fibre, foam and packaging products supplier Essentra (LSE: ESNT). On Monday it released an assessment of the recent Hurricane activity in the Americas, with two of its Health & Personal Packaging sites in Puerto Rico having been disrupted. While the facilities have not sustained physical damage, they have not been operational since 19 September.

The company is understandably focused on ensuring the safety and wellbeing of its employees. However, it expects the financial impact from the two facilities not being operational to be between £500k and £750k per week, although a significant proportion of that is due to be recovered through insurance policies.

While there is no certainty as to when the company’s two sites will be operational, Essentra continues to offer a favourable income outlook. It has a dividend yield of 4.2% from a payout which is covered 1.2 times by profit. With the company trading on a PEG ratio of 1.1, it also appears to offer significant upside potential.

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Client list

Equiniti posted mundane revenue growth of just 1.5%, along with a 0.6% decline in organic growth, pleading interest rate headwinds and second-half bias. The good news came in the form of 100% client retention across all divisions, with new wins including Aon Hewitt, British Bankers’ Association and House of Fraser, and fresh mandates from Alpha FX, Arix Bioscience, Global Ports, Ramsdens and Xafinity.

DS Smith, Imperial Brands, Lloyds Banking Group and Santander either renewed or extended, making up a strong client list. Equiniti also boasts strong cash flow conversion of 109%, free cash flow growth of 9.2% to £20.2m, underlying earnings per share growth of 6.2% to 6.9p and interim dividend growth of 6.7% to 1.75p, in line with the progressive dividend policy.

Moving on up

The £800m company’s recent acquisition of Wells Fargo Share Registration & Services has been warmly received, as it should turn the company into an international play, rather than a domestic one. The outlook remains bright despite today’s disappointment, even if recent share price growth has driven the valuation to 16.8 times earnings, on a yield of 1.9%. EPS growth is forecast to be just 2% this year, but that is set to hit 11% in 2018. Today’s share price dip could be a good time to jump on board.

Packaging and filter products producer Essentra (LSE: ESNT) is in the early stages of a major and much-needed turnaround, after delivering its third profit warning in a year in January. The £1.41bn company, which makes cigarette filters and plastic packaging, warned that profits should miss expectations due to operational issues at its health and personal care packaging unit. Today’s half-year results to 30 June cover what it calls a period of stabilisation and strategic development.

The Essentra-ials

Essentra still has a long way to go. Today it reported a 4% drop in like-for-like revenues, with adjusted operating profit down 35% at constant exchange rates to £43m, and basic adjusted earnings per share down 38% to 11.2p.

There was some good news. Net debt is now £207m, down from £379m on 31 December 2016, aided by the divestment of its Porous Technologies division. Operating cash conversion has improved from 59% to 70% year-on-year, reflecting greater underlying stability in the business. The half-year dividend remains unchanged at 6.3p per share. The stock  yields 3.8%.

Fighting back

Paul Forman, appointed CEO seven months ago, says Essentra has stabilised after a period of turbulence, and is starting to win back lost credibility with his customers, but there is clearly much to do. Packaging can be a lucrative industry – Mondi and Smurfit Kappa have got it wrapped – and recent problems have been caused internal rather than external issues.

Essentra is turning into a paper tiger with its share price up more than 30% in the last six months, although trading at 18.34 times earnings it needs to show more teeth.

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