2 FTSE 250 rebound plays trading at bargain valuations

Updated: 
Greene King

The following two FTSE 250 companies have struggled lately but they could be worth a spin at today's low valuations.

AA-rated investment

The AA(LSE: AA) has expanded beyond motor breakdown cover into car insurance, home insurance, route planning, travel and home boiler cover. But diversification hasn't helped its recent share price performance, with the stock down 17% over 12 months, and a hefty 43% over two years. It may style itself as the nation's favourite breakdown service, but the investment case has run off the road.

Its recent full-year results were more of a reliable Ford Mondeo than a racy BMW. Trading revenue chugged along, rising 1.6% at £940m, with trading EBITDA up 0.2% to £403m. Operating profit went into reverse, falling 4.4% to £284m, but at least the AA made a profit of £74m, turning round last year's £1m loss.

Profit rush

However, after three torrid years of negative EPS the outlook seems set to brighten, with a forecast rise of 12% in the year to 31 January 2018, followed by another 12% the year after. City forecasters reckon the AA's pre-tax profits are set to spiral as measured over a three-year period, rising from just £9m in the year to 31 January 2016, to £198m by 2019.

The AA currently trades at a forecast valuation of 9.9 times earnings, which looks undemanding given its growth prospects, while yielding a smooth 4%. It has increased membership, refinanced its cash debt and committed to a progressive dividend. You have to give it AA for effort.

Turning Greene

Greene King(LSE: GNK) now boasts more than 3,000 pubs, restaurants and hotels across the UK, including Chef & Brewer, Farmhouse Inns and Hungry Horse, as well as operating managed, tenanted, leased and franchised pubs from its headquarters in Bury St Edmunds. However, the £2.31bn company has been serving small beer to investors lately, with the share price down nearly 15% in the past 12 months.

Sales and market share are holding up well enough, but management has been nervous in recent months. It says that consumers are now more demanding and harder to please, yet stagnating wages mean they aren't much richer and consumer spending remains shaky. 

Royal opportunity

A hard Brexit could increase staffing pressures while the living wage will also push up the company's costs, as will the apprenticeship levy and business rate hikes. It isn't easy being Greene. Yet the share price has been rising in recent months, as consumer spending on eating out remains surprisingly resilient. For many, dining away from home is no longer an occasional treat, but part of everyday life. A strong Christmas trading period also helped wipe out many of management's worries.

With all these headwinds, EPS growth looks set to be slow, at between 1% and 4% over the next three years. However, trading at just 10.2 times earnings, it seems to me that a lot of worry has been priced-into the stock. Today's juicy 4.2% yield is covered 2.2 times, and forecast to hit 4.5% shortly. Greene King should retain its crown.

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Harvey Jones has no position in any 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.