One turnaround stock I'd buy with Provident Financial plc in December

Provident Financial PFG
Provident Financial PFG

Shares of public transport operator Stagecoach Group (LSE: SGC) rose by 5% after the firm published its half-year results this morning. Today I'll be looking at the firm's latest figures and also reviewing the recent news from struggling sub-prime lender Provident Financial (LSE: PFG).

Are Stagecoach and Provident good buys for investors looking for turnaround or income stocks?

Motoring ahead

Stagecoach shares received a sharp boost at the end of November when the company welcomed the government's new rail network plan. Today's 5% rise means the stock has gained 12% over the last month, taking it back to levels last seen in August.

Earnings per share rose to 13.6p during the six months ending 28 October, compared to 12.7p for the same period last year. Pre-tax profit climbed 8% to £96.7m, while the interim dividend was left unchanged at 3.8p per share.

Progress seems to be spread fairly evenly across the business. UK bus revenue per vehicle mile rose by 2.7%, while the group's London buses saw a 4.5% increase in vehicle miles.

The firm says it's seeing "improved revenue trends" in North America and "progress and opportunities" in the UK rail market. These include the extension of the East Midlands Trains franchise and "good progress" towards the award of the Virgin Trains West Coast franchise in 2019.

Good value

Today's figures look fairly reassuring to me. Dividend cover remains healthy and the group's debt levels aren't excessive. Management expects full-year results to be in line with current expectations, putting the stock on a forecast P/E of 9.2 with a prospective yield of 6.4%.

In my view this represents good value, so I'd rate the shares as an income buy.

Where next for Provident?

Investors backing the turnaround of sub-prime lender Provident Financial hit another bump in the road on Tuesday when the firm revealed that its Moneybarn business -- which provides car and van finance -- is under investigation by the FCA.

The regulator is looking into the processes used by Moneybarn to assess the affordability of loans. It's also investigating the treatment of customers in financial difficulties.

This is the second FCA investigation into one of the group's businesses. There's also an ongoing investigation into a highly profitable credit card payment protection service.

Some good news?

One highlight of yesterday's Moneybarn announcement was that it didn't include a profit warning. Nor did Provident's trading statement in October, when it confirmed previous guidance and reported good progress with the turnaround of its core doorstep lending business.

Analysts' forecasts are for Provident to generate earnings of 55.7p per share this year, recovering to 94.2p per share in 2018. On this basis, the stock trades on a 2017 forecast P/E of 14.2, falling to a P/E of 8.4 for next year.

There'll be no dividend this year, but the group is expected to return to the dividend list in 2018, with a forecast payout of 44p per share. This implies a prospective yield of about 5.5%.

As my colleague Rupert Hargreaves recently explained, investing in Provident isn't without risk. But on balance I think there's a decent chance that the group will be able to resolve its problems. I see the shares as a potential buy at current levels, despite the risk of further problems.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Stagecoach. 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.