2 dirt cheap value stocks looking like hidden gems

Trinity Mirror(LSE: TNI) has so many problems it could win an award for one of the market's most hated companies. Operating in what many believe is a dying business, Trinity has been under pressure in recent years thanks to the phone-hacking scandal, as well as falling print advertising revenue. Recently, a new threat has emerged in the form of rising pension obligations, which threaten to destabilise the business if not brought under control.

However, against this glum backdrop, management has continued to push the business forward acquiring peer Local World last year, devoting funds to develop the group's digital business, paying down debt, initiating dividend payouts and starting a stock buyback.

And despite all of Trinity's problems, there is a decent business hidden away somewhere. You just need to look at the figures to see that the company is a cash machine and despite falling revenues from advertising, there is still a strong customer base.

Cash cow

According to results for the 53 weeks ended 1 January, adjusted operating profit grew 25.5% thanks to the acquisition of Local World, and the firm generated nearly £80m in cash from operations, all of which was used to reduce debt. For a company with a market capitalisation of £263m, an operating cash flow of £80m is extremely impressive.

Still, despite this cash flow, it's unlikely negative sentiment surrounding the company will dissipate anytime soon. A trading update published today shows that for the 26-week period ending in July, group revenue is expected to fall by 9% following a 12% decline in print revenue offset by a 5% increase in digital sales. The company also announced today that it has increased provisions for settling historical legal issues to £7.5m and paid an additional £7.5m into pension schemes. It's clear Trinity has issues, but its valuation reflects this and any improvement may lead to a substantial re-rating. At the time of writing, the company is currently trading at a forward P/E of 2.5 and support a dividend yield of 6.7%.

Cheap income

Like Trinity, beaten down retailer Debenhams(LSE: DEB) is also trading at a bargain-basement valuation, which could offer tremendous upside if trading performance begins to improve.

Shares in the company are currently trading at a forward P/E of 6.7, and even though City analysts expect earnings per share to decline by 16% this year, earnings declines are projected to moderate next year. The company is still highly profitable with an average pre-tax profit of £90m predicted for the next two years. This healthy profit should easily cover the company's dividend payout during the period.

Analysts expect the firm to pay a dividend of 3.4p per share for the next two years, which is equal to a yield of 7.7% at current prices. Based on this, even if the shares go nowhere, investors will still receive a return of 15%. If trading begins to turn around, the returns could be even higher as the market turns positive on the shares.

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Rupert Hargreaves 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.

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