Buying shares in struggling companies can be a risky business. After all, things could get worse before they get better, and there is no guarantee that improved performance is ahead. However, it can also be a highly rewarding move as rising earnings and an upward re-rating can lead to high levels of capital growth. With that in mind, here are two companies which have struggled in the past but could be worth buying right now.
Reporting on Thursday was value retailer and education resources business Findel(LSE: FDL). Its most recent financial year was a positive one for the company, with like-for-like (LFL) sales growth of around 10% being recorded. This accelerated in the second half of the year and has helped to reduce net debt by around £5m versus the prior year. While there is still some way to go to reduce net debt from its current level of £80m, it is moving in the right direction.
Findel's largest business, Express Gifts, experienced a particularly positive year. Sales increased by 14%, but investment in customer recruitment meant that margins have been hurt. Alongside exceptional items such as customer refunds for flawed historic financial services products, as well as declining LFL sales in its Education division of 4%, risks remain for the business at the present time.
Since Findel trades on a price-to-earnings (P/E) ratio of just 8.9, it seems to offer a wide margin of safety. And with earnings due to rise by 9% this year and by a further 19% next year, it could become a profitable investment in the long run - especially with the potential for a refreshed strategy under a new CEO. While it is still a relatively volatile and high-risk stock to own, the potential rewards on offer are also significant.
Also struggling of late has been Mothercare(LSE: MTC). It is expected to record a fall in earnings of around 3% for the financial year to the end of March 2017. While somewhat disappointing, the company reported on Thursday that many of its international markets are now in growth. Furthermore, UK LFL sales were up 4.5% in the final quarter of the year. They were driven by online sales growth of 13.6%.
The company's performance is expected to improve significantly in the new financial year. Mothercare is forecast to grow its net profit by 12% this year and by a further 18% next year. This improved financial performance means its shares could be re-rated upwards.
There appears to be significant scope for this to take place, since the company trades on a P/E ratio of just 12.6. When combined with its earnings growth forecasts, this translates into a price-to-earnings growth (PEG) ratio of just 0.8. This suggests a share price recovery could be on the horizon following a 35% decline in the last year.
Certainly, some markets such as those in the Middle East remain challenging, but with a new store format and online sales growth, Mothercare could be a bargain buy for the long term.
Will either stock prove to be a major mistake?
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Peter Stephens owns shares of Findel. 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.