Although Sainsbury’s (LSE: SBRY) has experienced a turbulent period of late, the stock could offer good value for money over the long run. Alongside another company which released a positive trading update on Wednesday, it could be worth buying at the present time.

Improving prospects

The stock in question is trade exhibitions and conferences specialist ITE Group (LSE: ITE). Its trading update for the first six months of the financial year showed its performance was in line with management expectations. Revenue increased 42% to £107m, with the impact of acquired events and strong organic growth helping to lift the company’s top-line performance.

Although the company faces headwinds, such as Brexit and macro-economic issues in Turkey, it’s expected to post a rise in earnings of 13% in the current year. This puts it on a price-to-earnings growth (PEG) ratio of 1.4, which suggests it could offer good value for money.

With ITE Group continuing to implement its strategy, which includes investment in areas such as enterprise resource planning, it appears to have a bright future. Since it has a dividend yield of 3.5% which is covered 2.2 times by profit, it may also offer improving income investing prospects over the long run.

Uncertain outlook

With Asda having recently overtaken Sainsbury’s to become the UK’s second-largest supermarket, news flow for the business has been weak of late. Of course, there are concerns among some investors that the planned merger between the two is causing Sainsbury’s to become distracted. Whether this is the case or not, the deal appears to be unlikely to complete after concerns were raised by the competition watchdog regarding possible price increases for consumers.

As such, Sainsbury’s shares have been under pressure. They now trade 25% lower than they did just six months ago and have failed to take part in the wider FTSE 100’s rally since the start of the calendar year.

In the near term, the stock could experience further volatility. However, with earnings growth of 4% expected in the current year, it seems to offer good value for money. Sainsbury’s trades on a price-to-earnings (P/E) ratio of just 11, which indicates it may offer a wide margin of safety. Meanwhile, a dividend yield of 4.7% that’s covered 1.9 times by profit indicates there may be income investing potential on offer.

Although UK retail shares may not be a popular area of investment at the present time, the total returns on offer could be impressive at a time when consumers are experiencing real-terms wage growth. As such, now could be a good time to buy the stock for the long term.

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The stock edged lower again today after the company confirmed press reports that founder and chief executive Sir Martin Sorrell has been accused of misusing company funds and is under investigation.

Sir Martin rejects the allegations, which are being investigated by an independent law firm.

Since founding WPP more than 30 years ago, he’s turned it into a FTSE 100 firm that’s one of the largest of its kind. But global advertising spending is under pressure as big companies cut costs.

I believe WPP’s sliding share price is a reflection of a weaker outlook for profit growth, and of uncertainty over the future management of the firm. Even if today’s allegations are unfounded, I expect this incident to increase the pressure on the firm to plan for Sir Martin’s retirement.

Cheap enough to buy?

Despite weaker market conditions, this media giant remains a formidable business. WPP is expected to generate an after-tax profit of £1,487m in 2018 on sales of £13,018m. This implies a net profit margin of 11%, which is pretty good.

The only problem is that these figures are around 20% lower than in 2017, when WPP reported sales of £15,265m and a net profit of £1,912m. The group’s net profit margin last year was 12.5%.

Analysts’ consensus forecasts suggest that 2018 could be the low point for profits, which are expected to rise by about 5% in 2019. If this view turns out to be correct, then the stock could be worth considering at current levels. Trading on a forecast P/E of 9.5 with an expected yield of 5.4%, this could be a value buy.

My main concern is that the outlook could continue to weaken. I think it makes sense to stay on the sidelines for a little longer.

Are further gains likely?

The advertising market is uncertain, but a strong global economy means that some types of marketing business are performing well. One example is trade exhibition and event organiser ITE Group (LSE: ITE), which operates extensively in Russia and Asia.

This £425m firm says that results for the six months to 31 March are expected to be in line with expectations. Revenue for the half year is expected to have risen by 7% to £75m, but revenue growth from major events appears to be stronger.

Four of the group’s top 10 events took place during the first half. ITE says that these delivered “double-digit” like-for-like revenue growth. This momentum is expected to continue through the rest of the year.

The company said today that it has already booked 85% of forecast revenue for the current year. On a like-for-like event basis, this represents revenue growth of 14%. However, as not all events are repeated every year, overall revenue growth is expected to be lower, at about 5%.

My view

ITE’s decision to focus on its biggest events seems to be working well. However, the shares currently trade on 18 times 2018 forecast earnings, with a prospective yield of 2.6%.

Earnings are expected to rise by about 15% next year, but the shares still look fully-priced to me. I’m not tempted to buy at these levels, although I would continue to hold the stock while performance remains good.

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There has been a slow share price recovery in the past two years, as the firm is engaged in a “3-Year Transformation & Growth (TAG) Programme” — but looking at Tuesday’s full-year results, I’m not feeling any great attraction right now.

The company, which organises trade exhibitions and conferences in Russia and the surrounding central Asian region, reported a 13.5% rise in revenue, but that led to a 13.4% drop in headline pre-tax profit and a fall in headline earnings per share from 10.7p to 8.1p. The full-year dividend was cut from 4.5p per share to 4p, to yield just 2.3% on the current 177p share price.

Tardy refocus

Mark Shashoua, in his first full-year as chief executive, was upbeat about “the successful rollout of the first phase of our TAG initiatives and our decision to focus on Core events that have the greatest capacity for growth“. But one thing that does disturb me is that it’s taken this long for the new strategy to come into effect, and that it needed new management first — the company also has a new chief financial officer in Andrew Beach. I reckon ITE should have been reporting the first phase of its turnaround strategy at least a year ago.

Analysts expect earnings per share to remain flat in the current year, so at least the fall would be arrested, but that still leaves the shares on a forward P/E multiple of more than 21.

I think that’s too expensive right now, and that there are far better investment opportunities out there.

FTSE 100 growth

You might not usually expect to unearth many hot growth prospects in the FTSE 100, as even the smallest company in London’s top index already has a market cap of nearly £3.5bn. 

But I reckon otherwise, and I see private hospitals group Mediclinic International (LSE: MDC) as a serious growth candidate that I can’t help feeling a lot of investors have overlooked — possibly because it’s only had its London listing since February 2016 after a merger with Al Noor Hospitals.

Since joining the FTSE, Mediclinic’s share price has fallen by 40%, and that won’t have helped. But I see decent long-term growth, coupled with a progressive dividend policy that could easily turn this company into a cash cow over the next decade.

Big debt

On the downside, there are concerns about the company’s debt pile, which stood at £1,687m at the interim stage announced on 16 November, while underlying earnings fell. But first-half revenue actually rose by 10%, and the weak profit figure was largely down to tough conditions in Switzerland and Southern Africa.

Life on the LSE got off to a lacklustre start — EPS dropped by 19% for the year to March 2017, and there’s a further fall of 3% forecast for the current year.

But there’s earnings growth pencilled in for March 2019, with a 21% rise that would drop the P/E to 16, and that’s not a bad valuation for a growth prospect.

And on the debt front, the company is very much in the net investment stage right now, and once it gets closer to maturity I can see its strong cash flow being used to pay that down and then help get the dividend growing strongly.

The post Why I’d sell this turnaround stock to buy a ‘secret’ FTSE 100 growth stock appeared first on The Motley Fool UK.

Uncertainties

News of a contract win today has sent Interserve’s shares up a couple of pence to 118p, continuing a recovery from a low of 74p on 14 September. Nevertheless, they remain down by 65% for the year to date.

The company is suffering a massive headache from exiting its Energy from Waste (EfW) business. A previous provision of £70m for incurred and anticipated losses was raised to £160m on 20 February and to “significantly” in excess of £160m on 14 September. The company’s inability to accurately forecast the provision suggests that the complexities and uncertainties mean it has no real handle on the final costs.

As if this is not bad enough, there was further ominous news in the 14 September update. The company advised:“Trading in the UK in July and August was disappointing, particularly in support services, but also in the construction division. As a result of this, the board now believes that the outturn for the year will be significantly below its previous expectations.”

Downside risk

While Interserve legitimately calls itself an international business, the UK totally dominates. It’s currently contributing 90% of group revenue and 97% of operating profit at a skinny margin of 3.1%, while international’s 3% contribution to operating profit is at an even lower margin of 1.2%.

Interserve’s current market cap of £172m is dwarfed by this year’s expected average net debt of between £475m and £500m. And while it has committed facilities of £573m and “continues to believe” it will be able to operate within its banking covenants for this financial year, I see serious downside risk. This is due to the EfW nightmare, the company’s low profit margins, the ominous news on recent UK trading and the minimal impact from its international business. I’d want some visibility on the outlook before considering making an investment.

Signs of recovery

I see a clearer outlook and investment case for exhibitions group ITE (LSE: ITE), whose shares are up 6p today at 184p after a trading update for its financial year ended 30 September.

The company has struggled for a few years, without plumbing the depths of uncertainty of Interserve, and is now showing signs of recovery. Its shares are up 20% so far this year.

In today’s update, management said it expects to report a 13% increase in revenue and a first year of underlying like-for-like growth in four years, despite challenging conditions in some of its markets. The £495m cap firm also said today that its financial position continues to strengthen, with strong cash conversion helping to reduce net debt to £50m from £59m last year.

Positive outlook

ITE’s broad spread of international revenues is serving it well, as is its strategy of focusing on its core high-yielding, market-leading events, and implementing a sales performance culture. Management expects to deliver mid-term sustainable operating margins in the high 20s.

Although it’s trading on over 20 times earnings, I see potential for earnings upgrades and for the company to rapidly grow into the rating. On this basis, I rate the stock a ‘buy’.

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Still, according to a trading update published by the company today, ITE is back on the part to growth. For the three months to 30 June, the company produced revenue of £58m, up from £46m in the year-ago period, and like-for-like revenue growth of 9%. A recovery in the group’s key Russian market was responsible for most of this increase. For the nine months to 30 June revenue is 4% ahead on a like-for-like basis. A healthy cash flow from operations has also helped the company reduce net debt to £54m, down from £64m in the year-ago period. For the full year, management is expecting revenue growth of 4%.

Expensive recovery 

This steady growth shows that the company is recovering from some of its problems, but despite the improvement, the shares still do not look attractive to me. Specifically, at the time of writing shares in ITE look overvalued, especially when compared to the firm’s shrinking earnings. Even though revenue is rising steadily, City analysts expect ITE’s earnings per share to contract by 24% for the fiscal year ending 30 September, following declines of 30% for the last fiscal year and 24% for the year ending 30 September 2015. 

And after three consecutive years of earnings contraction, shares in the group trade at a forward P/E of 19.3, a high multiple that seems unwarranted considering the company’s current position. The shares offer a dividend yield of 2.7% although this is hardly enough to compensate investors.

A better buy? 

A better buy might be Tarsus Group (LSE: TRS). Over the past year its shares have produced a return of 11%, and over the previous five years, the shares are up by almost 80% excluding dividends. Media group Tarsus has clearly gone from strength to strength over the period, unlike its peer. Earnings per share have expanded rapidly from 12.2p for 2012 to 27.1p for 2017. Meanwhile, revenue has more than doubled from £51.5m to £125m, and pre-tax profit has surged from £8.4m to £40.7m. Despite this rapid growth, the shares still trade at a relatively attractive valuation. 

Indeed, even though City analysts expect the company to report earnings per share growth of 78% for this year, the shares only trade at a forward P/E of 10.3. Why? The firm’s earnings are lumpy and are expected to decline by 32% for 2018. But even considering this decline, the shares still look more attractive than those of its peer above as they trade as at a 2018 P/E of 15.5. Tarsus also beats its peer on yield with a dividend yield of 3.4% covered nearly three times by earnings per share.

Overall, growth stock Tarsus looks to me to be a better buy than turnaround ITE.

The post Why I’d sell this turnaround stock to buy this hot growth stock appeared first on The Motley Fool UK.

The boom in North American construction and online retail over the last five years or so has propelled operating profit from $1.4m in 2012 to $21.2m in the same period.

Shares in the company dipped slightly earlier this week after the company reported a flat Q1 in North America. This market is all-important to the company and accounted for 71% of its revenues last year, but the sector looks healthy enough.

Somero trades on a PE of 15 and yields over 7% this year, returning to a more manageable 4% next year. With a $12.7m warchest and a base dividend covered four times by last year’s free cash flow, Somero surely looks attractive to income investors.

Cash-flow-positive in crisis

Embattled trade show operator ITE Group (LSE: ITE) yields 2.9%. The company primarily specialises in oil trade shows in Russia and surrounding countries. The shares have slipped 32% in three years as the deteriorating oil price and a weak ruble put pressure on events in its major markets.

However, the trade show business has wonderful economics that have allowed ITE to not only maintain a dividend, but remain cash-flow-positive in a time of crisis. Because the company tends to operate the number one or two shows in a given industry, a certain level of attendance is all but assured. 

The big players simply must attend these events and usually book months in advance, allowing ITE to negotiate on all manner of costs including floor space booked for the event ahead of time.

The company has diversified away from oil in recent years but new CEO Mark Shashoua has put the brakes on any further deals for the time being to allow the balance sheet to strengthen. If conditions improve, cash-flow could explode. The dividend would likely follow. If it recovered to its past high of 7.4p, investors buying-in today could receive a double-digit yield.

Heavy Investment About To Pay Off?

Devro (LSE:DVO) manufactures sausage casings and the demand for this cheap source of protein is growing globally. Traditionally, casings are made from pig or sheep intestines, but this method can’t keep up with rampaging demand. Collagen, a far more readily available product, is a great replacement and is easy for manufacturers to work with. 

The company has struggled in recent years, but new factories in China and the US are operational and have significantly increased capacity. Trading at 14.5 times operating cash flow – and pumping most of the cash generated back into capital expenditure – the shares don’t look incredibly cheap. However,  the story at Devro is more future-focused. The company has invested millions in recent years resulting in significant cost cuts and increased capacity. Coupled with surging demand from China, I believe Devro’s 4.0% yield could grow 50% by 2019. 

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Robust performance

Reporting on Tuesday was international exhibitions company ITE (LSE: ITE). Its performance in the first six months of the year was in line with management expectations, with revenue up 2% on a like-for-like basis versus the comparative period. It was boosted by some improvement in the economic situation in Moscow, where early sales and marketing initiatives have helped to offset acontinued weaker performance from Central Asia and Turkey.

Looking ahead, ITE expects trading conditions in a number of its regions to be challenging. However, it has recorded bookings which amount to 92% of market expectations for revenue in 2017. Furthermore, they are around 7% ahead of last year on a LFL basis, with trading volume around 1% higher.

Certainly, ITE is highly dependent on the ruble/sterling exchange rate, but it is forecast to record a bottom line rise of 15% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.1, which indicates its shares could rise in future.

In addition, a dividend yield of 2.7% could appeal if inflation moves higher. Brisk dividend growth could lie ahead due to payouts being covered twice by net profit, which could make ITE a sound income play as well as a growth stock.

Consistent growth potential

Also reporting on Tuesday was digital communications company Next Fifteen (LSE: NFC). Its revenue increased 32% in the 2017 financial year, which helped to raise operating profit by 52%. Operating profit was also boosted by a rise in the operating margin of 190 basis points, which shows that the company’s strategy is working well. For example, it has been able to improve the efficiency of a number of its UK businesses while also acquiring high-growth, high-margin agencies.

Looking ahead, further growth in the US could be on the horizon. Next Fifteen was able to deliver organic growth in its US business at a double-digit rate in the 2017 financial year. It also benefitted from the 2015 merger of its agencies in Asia Pacific, Europe and the Middle East. Together, these changes are expected to result in an 8% earnings rise in the next financial year. This puts the company’s shares on a relatively enticing PEG ratio of just 1.8.

Certainly, there may be better times to buy Next Fifteen or ITE. Share prices are generally high at present, with the FTSE 100 being near a record high. As such, a dip in the prices of either stock could be an opportune moment to buy for the long term.

The post 2 small-cap stocks I’d buy on the next dip appeared first on The Motley Fool UK.

The upshot is that revenue was broadly flat, as the company’s plan to diversify into new markets paid off. Like-for-like sales were positive for all other regions and Asia, in particular, was a bright spot, as Indian events sold particularly well. Targeting increasingly wealthy markets such as India, China and Africa is a sound plan as it diversifies risk and offers high growth potential in the long run.

Investors also shouldn’t be overly worried that ITE posted a statutory £4.1m pre-tax loss for the period. Much of this was due to non-cash charges such as a £24.6m good will impairment. Indeed, operating cash flow over the course of the year actually rose from £37m to £41m, which comfortably covered dividend payments and small bolt-on acquisitions.

Despite tough trading conditions in Russia and former CIS states, the region will eventually bounce back. This may take a while, but ITE will be able to survive this downturn with 55% of revenue now coming from outside these countries and strong cash generation. I wouldn’t buy shares until after the new CEO details his review of the business at interim results next year, but ITE is still well placed to benefit from the long term potential of emerging markets.

Less risk, same reward?

A safer way of gaining exposure to fast growing developing markets may be consumer goods company PZ Cussons (LSE: PZC). Cussons was founded in Sierra Leone well over a century ago and still considers West African neighbour Nigeria its core market. In fiscal year 2016 Nigeria accounted for over 40% of group revenue but was unfortunately a drag on performance, as the Naira plummeted in value due to low oil prices and the Central Bank of Nigeria allowing the currency to freely float.  

Trading conditions outside of Nigeria were significantly more positive, with European sales increasing 5.6% year-on-year, which proved more than enough to eke out a small increase in revenue at the group level. Looking ahead, management sounded a cheery note by forecasting underlying sales and profit growth from all regions in 2017.

But, it’s not the next year or two that makes PZ Cussons an attractive option in my eyes. Rather, I like shares because the long term potential to be found from selling soap, detergent and other daily necessities to fast growing populations in Indonesia, Nigeria and elsewhere is staggering.

The bad news is that other investors are also attracted to this long term potential, because the company’s shares are pricey at 18 times forward earnings. But, with a healthy balance sheet, a growing presence in stable markets such as the UK and Australia, and leading market share in key growth markets, I believe PZ Cussons is a great way to gain exposure to emerging markets while also limiting your downside.

The post Emerging market weakness sends ITE Group plc profits down 20% appeared first on The Motley Fool UK.

This rise in revenue contributed to an increase in pre-tax profit of 36%, which was aided by fewer one-off costs versus the previous year. But with dividends per share falling by 40% as a higher dividend coverage ratio is sought by ITE, income investors may not be overjoyed about the update.

Looking ahead, ITE seems to have a sound strategy through which to navigate the challenges which it faces in Russia. Its diversification strategy should aid its long-term financial performance and with a new CEO set to take over in September and ITE due to grow its bottom line by 8% next year, investor sentiment could pick up and push the company’s share price higher. That’s especially the case since it trades on a price-to-earnings-growth (PEG) ratio of only 1.7, which indicates that it offers good value for money.

Upside potential

Similarly, Findel (LSE: FDL) also appears to offer significant capital gain potential. Its restructuring seems to be a sensible strategy, with Kleeneze and Kitbag both being sold-off recently. The more streamlined Findel seems to have bright future prospects, with its bottom line forecast to rise by 11% in the current year and then by a further 19% next year. This has the potential to provide a step-change in investor sentiment, with Findel’s PEG ratio of just 0.3 indicating that it has major upside potential.

Certainly, Findel is undergoing a significant period of change at the moment and with its track record of financial performance being somewhat volatile, many investors may view it as being a risky stock to hold. However, with it having such a wide margin of safety, Findel’s risk/reward ratio holds significant appeal and it could begin to reverse the 15% fall in its share price which has been recorded since the turn of the year.

Change at the top

Meanwhile, Genel Energy (LSE: GENL) has today announced the appointment of a new Chief Operating Officer (COO). While this may not significantly move Genel’s share price in either direction, the rising price of oil has the scope to do so. In fact, with oil having risen by around 60% since its lows earlier this year, sentiment towards the wider oil sector could pick up if the profitability of the industry’s incumbents improves.

For example, shares in Genel have risen by 36% in the last month alone and looking ahead, a rising oil price could lift the company’s valuation yet further. However, with Genel having significant geopolitical risk within the Northern Iraq/Kurdistan region as well as a major impairment due in the current year’s accounts from a lowering of reserves estimates, there appear to be better options elsewhere within the oil sector for investors seeking to benefit from a rising oil price.

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However, finding the best stocks to buy can be challenging. That’s especially the case during turbulent periods for the stock market, since it can throw up a number of shares that appear to offer excellent value for money, but which in reality could be little more than value traps.

For example, Centrica (LSE: CNA) has posted a fall in its share price of 14% in the last three months, which puts the domestic energy supplier and gas producer on a price to earnings (P/E) ratio of 12.7. This is relatively low for a utility company, but in Centrica’s case it offers far less stability than most of its sector peers since it is at the beginning of a major restructure which will see it dispose of a number of gas production assets in the coming years as it focuses on becoming a pure play domestic energy supplier.

This should provide the company’s investors with greater certainty regarding future levels of profitability, since Centrica will not be so dependent upon the price of oil and gas. Moreover, it should mean that dividends are not slashed in future years as they were this year (by 30%) and, with Centrica having a yield of 5.3% and dividends being covered 1.5 times by profit, it appears to be a company with considerable long term total return potential.

The same could be said of BT (LSE: BT.A) as it shifts its strategy towards becoming a dominant quad play operator. In the long run its earnings growth is likely to be very upbeat and the current level of discounts, offers and investment that BT is making in its offering is likely to allow it to win more customers than many of its rivals, thereby placing it in a strong position in future years.

The problem, though, is that BT’s share price could come under pressure in the intervening period. That’s because it is taking significant risks in terms of its acquisition of EE and the considerable level of investment it is making in its pay-tv, mobile and broadband offering, with its balance sheet already having high levels of debt as well as a major pension liability. Therefore, while BT trades on a P/E ratio of 13.9, after falling by 6% in the last three months, there may be better opportunities to buy it further down the line.

Meanwhile, exhibitions company ITE Group (LSE: ITE) today reiterated its full-year guidance amidst challenging trading conditions for the business. The weak Russian and Asian economies are set to contribute to a fall in revenue of almost 22% versus last year, with net profit expected to fall by 25%. Looking further ahead, ITE Group’s bottom line is due to continue to fall, with a drop of 4% being pencilled in for next year.

Clearly, a lower oil price is affecting demand in Russia, while a weak Rouble is also hurting its short term performance. And, while ITE Group trades on a P/E ratio of just 9.4, its shares could continue to fall following their 16% decline in the last three months, meaning that a better opportunity to buy may present itself in the coming months.

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