Recruiter PageGroup(LSE: PAGE) issued a trading update today ahead of its annual results. It reported a record gross profit in both the fourth quarter and full year. As a result, it said: "Full-year operating profit is expected to be ahead of consensus, but within the range of current market forecasts."
The shares are up over 8% at 510p, as I'm writing, valuing this FTSE 250 firm at £1.7bn. It's a well-managed business, boasts net cash on its balance sheet and has excellent geographical diversification. So why is it a stock I'd sell?
What value growth?
The company reported a gross profit of £711.6m for 2017, up 14.6% on the prior year and a still-excellent 9.9% at constant exchange rates. The performance was strong across all geographies, with the exception of the UK (20% of group profit), which declined 3.8% year on year.
Based on the upgraded guidance on operating profit, I reckon we're looking at earnings per share (EPS) of around 27.5p for 2017 (19% up on 2016). This puts Page on a price-to-earnings (P/E) ratio of 18.5 and a price-to-earnings growth (PEG) ratio a tad to the value side of the PEG fair value marker of one.
However, looking ahead, management is cautious on the UK (due to "ongoing uncertainty around the macro environment") and also on Australia and Brazil. As such, I don't see much scope for increasing the pre-update 8% EPS growth analysts were forecasting for 2018. Erring on the generous side, I pencil in 30p EPS for the year, which gives a P/E of 17 and a PEG of 1.9. As the latter is significantly above PEG fair value, I rate the stock a 'sell'.
Reasons for scepticism
While I see Page as a solid company I'd be happy to invest in at a lower valuation, Internet of Things specialist Telit Communications(LSE: TCM) is a company I've been deeply sceptical about.
Going back to March last year, I wrote about the gulf between its impressive paper profits and far-from-impressive cash flow. By August, its founder and chief executive, Oozi Cats, had departed after revelations he'd fled fraud indictments in the US in the 1990s. And by November, I continued to see the company as uninvestible for a number of reasons. Has news from the company since then changed my view?
Boardroom changes and swing to loss
In the boardroom, Telit appointed a new non-executive chairman and a new senior independent non-executive director. Finance director Yosi Fait, who stepped into Mr Cats's CEO shoes, was given the gig on a permanent basis. He'd sold all his shares two days before an impending debt covenant breach on 30 June but the new non-execs were satisfied that, "having examined the share trading with the assistance of external legal advice, on this basis that it was lawful."
On the business front, Telit issued a profit warning, saying it "expects adjusted EBITDA for the year to be materially below previous guidance." Today it's announced an "expanded strategic partnership" with a telematics company but with no detail on how much it might be worth. Meanwhile, it's aiming to cut costs and remains in discussion with its lenders about amending its debt covenants.
Trading at 152p, with a market cap close to £200m and forecast to report an annual loss of £10m, I continue to rate this AIM-listed stock a 'sell'.
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G A Chester 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.