Why I wouldn't buy Mears Group plc as shares crash on trading update

The share price of Social Housing and Care support services company Mears(LSE: MER) has dropped by as much as 9% today after it released a disappointing update. In the short run, the situation could worsen as investors focus on what today's update could mean for the financial performance of the company in the near term. With that in mind, could one of the company's sector peers be worth buying instead?

A difficult period

Since the release of half-year results by Mears in August, trading conditions for its Housing division have continued to be tough. Many of its clients have focused on ensuring that their portfolios are safe and compliant, which has resulted in a softening of revenues for the current financial year.

As well as this, the company is expected to report an exceptional item of up to £16.5m in the current financial year. This relates to the disposal of its Mechanical and Electrical division in 2013, which included an entity operating in the UAE that had a number of contractual guarantees from the company. They remain in place, and a number of them have been called. As such, the company is required to settle funds against the contingent liabilities.

Although there is a realistic expectation that the funds will be recovered, they will be provided for in the company's current financial year. This could cause the performance of the business to disappoint, which may mean investor sentiment in the stock remains weak over an extended period of time.

While the performance of the company's Care division has been in line with expectations and its bid pipeline remains strong, its share price could disappoint in the short run. As such, there may be superior investment opportunities available elsewhere.

Dividend potential

Operating within the same sector as Mears is Travis Perkins(LSE: TPK). The building products specialist is experiencing a challenging year, with its bottom line forecast to fall by 6%. Much of this is due to weakness in the UK economy, with Brexit seemingly causing confidence across the sector to come under pressure. As such, its share price could be volatile in the near term.

However, in the long run Travis Perkins could deliver improved performance. It is expected to return to positive growth next year, with its bottom line expected to rise by 4%. It trades on a price-to-earnings (P/E) ratio of just 13, which suggests that it could offer good value for money.

Furthermore, the company has a dividend yield of 3%. While not the highest in the FTSE 350, it could rise at a rapid rate. Dividends are currently covered 2.5 times by profit, which suggests that they could rise at a much faster pace than earnings over the medium term without jeopardising the company's financial standing. As such, and while its outlook is highly uncertain, Travis Perkins could be worth buying for the long term.

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Peter Stephens 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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