Is now the time to buy these falling knives?

Questions and answers
Questions and answers

Provident Financial(LSE: PFG) announced late last Tuesday that a restructuring in its home credit field organisation would result in a £40m shortfall in loan collections this year, and its shares took a battering as a result, plummeting 17.5% on Wednesday.

Provident is in the process of migrating to a "more efficient and effective" home credit field organisation, which involves employing 'Customer Experience Managers' to serve customers rather than using self-employed agents. The restructuring has caused more disruption than expected, and the company advised that profits in the consumer credit division this year are now likely to be around £60m, down from £115m last year.

After the significant fall in the share price, is now the time to pick up a bargain or is there further trouble ahead?

Temporary problem

In my view, this appears to be a temporary problem that can be resolved soon. The company has stated that the vast majority of new field based roles have been filled and that from early July, the rate of collections will begin to normalise. The board also said it is confident in the strategic rationale for the new operating model as it should translate into "improved sales conversion, improved collections and a more cost-efficient business."

Given Provident's track record, I am cautiously optimistic that now could be a good time to buy the stock. Over the last five years, revenue has increased from £911m to £1,183m and net profit in that time has more than doubled to £263m. Dividend investors have enjoyed an excellent run, with the dividend payout growing from 69p to 135p. As it stands, analysts still expect dividend growth of 5% for FY2017, although it should be noted that coverage is not expected to be that high, at 1.2 times.

In the last week, analysts have revised their forecast earnings per share for this year down to 165p, which at the current share price equates to a forward P/E ratio of 14.5. While that's still not a dirt cheap valuation, I believe that now could be a good time to 'average in' to Provident Financial for those with a long-term mindset.

A riskier investment case

By contrast, one stock I'm not so tempted by is oil and gas service provider Petrofac(LSE: PFC).

Its shares have tanked since early April, falling from above 900p to below 420p today, after it announced that the Serious Fraud Office (SFO) had launched an investigation into the company and its subsidiaries. The investigation is related to its connections with Unaoil, a company it engaged in services with in 2002 and 2009, and Petrofac is being investigated under suspicion of bribery, corruption and money laundering. In late May Chief Operating Officer Marwan Chedid was suspended and consequently resigned from the board.

The share price fall has left it trading on a forward looking P/E ratio of just five and prospective yield of 11%, and for this reason, there appear to be many risk-tolerant investors who are looking at the drop as an opportunity.

However personally, I will be steering clear. Ratings agency Moody's recently reduced the company to junk status and with the stock's dividend looking unsustainable in recent years, in my view there's simply too much uncertainty involved in the investment case to justify buying the stock at this point in time.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. 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.

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