2 exciting turnarounds with massive potential

It has been a rough 12 months for shares in Mothercare(LSE: MTC), but after several years of restructuring, it now looks as if the group is back on track.

Today the company reported its full-year results for the 52-week period to 25 March 2017, and on the whole, the figures are relatively attractive. Overall group sales during the period grew 6.3% year-on-year and group underlying profit before tax rose 1% to £19.7m. Underlying earnings per share increased 0.9% to 9.7p.

Mothercare has undergone a significant transformation since it began its restructuring plan three years ago and now looks as if the business is well placed to grow. At the core of the restructuring has been the group's swing towards online retail, the fastest growing section of the retail market. At the end of the period, 41% of UK retail sales came from online channels, and overall online sales rose by 7.8% year-on-year.

A newly designed app is helping convert customer enquiries into sales according to management and orders from clients are helping generate a massive database of customer information, to be used for marketing purposes. In today's release, management notes that the company now has over 3m clients logged on its website with 4.3m e-receipts that will help tailor sales offers.

Returning to health

City analysts expect these changes to start showing through in the company's earnings during the next two years. Even though earnings have stagnated this year, for the year ending 31 March 2018 analysts have pencilled-in earnings per share growth of 10%, and earnings growth of 15% is expected for the year after.

Based on these figures the company is trading at a forward P/E of 11.6, which seems to undervalue its growth potential. As Mothercare proves that its turnaround is firing on all cylinders, it's highly likely this valuation will re-rate higher.

Severely undervalued

Floundering tour operator Thomas Cook(LSE: TCG) also reported an impressive set of results. For the six months ended 31 March 2017, the company saw revenue rise 12% to just under £3bn and the loss for the slower winter period decreased by £11m to £227m. The company also managed to reduce its debt, which has been a drag on operations for some time. Debt fell by £34m on a like-for-like basis.

After five years of problems, it looks as if Thomas Cook's turnaround is starting to gain traction. Following the strong first half performance, analysts are expecting the company to report a pre-tax profit of £181.6m for the year ending 30 December 2017, the largest level of profitability in five years. Earnings per share are expected to increase 17% year-on-year to 9.9p, giving a forward P/E of 9.6.

As the company continues to build on its steady recovery analysts are expecting earnings per share growth of 20% the following financial year.

Based on these forecasts, shares in Thomas Cook are trading at a 2018 P/E of 7.8. Once again, based on its rapid growth this depressed valuation does not seem warranted. A P/E of 14 or more might be more acceptable implying an upside of around 100% from current levels.

Time to buy?

Thomas Cook and Mothercare look attractive after today's updates but don't just take my word for it, you should always conduct your own due diligence before making an investment decision. To help you decide whether or not stocks like these deserve a place in your portfolio, we've put together this free report.

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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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