Why I'd sell this FTSE 250 stinker to buy this FTSE 100 star

The Motley Fool

Another financial release, another reason for investors to shift out of precious stones play Petra Diamonds(LSE: PDL).

The stock was last dealing 6% lower on Monday following a pessimistic response to full-year trading details. It is now changing hands at its cheapest since January 2016.

Petra announced that revenues rose 11% in the 12 months to June 2017, to $477m. But this could not stop adjusted net profit after tax slumping 54% to US$29m.

Chief executive Johan Dippenaar commented that "the shortfall against [production] guidance, in conjunction with the significant strengthening of the rand on our predominantly rand-denominated cost base, impacted our financial results for the year."

The Jersey-based digger produced a record 4m carats during fiscal 2017, although this well fell short of the 4.4m-4.6m carats projected at the start of the period. That was due to operational problems at its Cullinan and Finsch projects.

While the company said that it remains on track to pull 4.8m-5m carats out of the ground in the current year, investors took fright after Petra announced that it may fail to meet its debt obligations should the shipment issues from its Williamson mine in Tanzania fail to be resolved. The African nation last week had blocked the export of a parcel of diamonds comprising 71,654.45 carats from the asset as part of a crackdown on the domestic diamond market.

Petra advised that "should [we] be unable to resume sales from Williamson during the first half, the company may breach the two EBITDA-related covenant measurements (related to its banking facilities) to, and as at, 31 December 2017, in which event the company will commence early discussions with its lender group to reach a resolution.

"Petra will monitor the situation very closely and take decisive action if required to preserve shareholder value," it added.

Too much risk

Despite these problems however, City projections suggest the company may be worth checking out at the present time. Earnings at the diamond digger are predicted to boom 231% in fiscal 2018, resulting in a dirt-cheap forward P/E ratio of 6.4 times.

These heady growth estimates are still not enough to encourage me for one to invest, however. The prospect of a tougher operating environment in Tanzania is problem enough, but the knock-on effect on Petra's debt obligations adds an extra layer of worry.

Moreover, when you consider that question marks remain over the outlook for diamond prices in the near term at least, and the possibility of fresh production problems down the line (a problem that is not exclusive to Petra, of course), I reckon the excavator carries far too much risk right now.

A proven hero

Instead I reckon those seeking robust and reliable earnings expansion need to check out Bunzl (LSE: BNZL).

The company's broad sphere of operations and vast geographical reach has kept the bottom line ticking higher for many years now. And with the London company still aggressively pursuing M&A, City brokers expect profits to keep tearing higher. The support services star recently declared that annual committed spend of £546m from the beginning of January to August 29 represented a record high with four months of the year still remaining.

Rises of 7% are predicted for both 2017 and 2018, resulting in a forward earnings multiple of 19.7 times. I reckon this is stellar value given Bunzl's brilliant defensive qualities.

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Royston Wild 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.