Is the worst over for 'turnaround' stocks BT Group plc and Standard Chartered plc?
The past 12 months have been a rough period for BT Group(LSE: BT.A) as the company has struggled with its Italian fraud scandal, a ballooning pension deficit and demands from regulators. Unsurprisingly, the share price has suffered as a result of these headwinds.
Over the past 12 months, shares in BT have fallen by 29.3% excluding dividends, and unfortunately, there could be further losses to come.
Further losses to come
In the weeks after BT unveiled it would be taking a huge hit to profits thanks to larger than expected writedowns at its Italian arm, its shares recovered some lost ground, rising from a low of 302p to a high of 340p, a gain of 12.6%. However, after hitting this three-month high, shares in the firm have fallen back down below 310p as regulatory issues persist.
There's no denying that headwinds against BT are building. Over the past five years it has grown by aggressively expanding into the pay-TV and mobile markets, but now competitors are fighting back with the likes of Vodafone and Sky trying to undercut it. At the same time, BT is being forced by regulators to cut the price it charges rivals to use its infrastructure and to lower line rental costs for elderly customers, two formerly stable revenue streams it used to fund its assault on new markets. These constraints will severely impact its ability to tackle the increasing competition now facing it.
City analysts are worried about BT's prospects too. They expect earnings per share to fall 17% for the fiscal year ending 31 March 2017 and not recover to 2016's levels until after the end of the decade. These figures may be subject to revisions lower if the company struggles to fight back against competitors. Overall, shares in BT may have further to fall and the current low valuation of 11.1 times forward earnings, looks appropriate considering the uncertainty facing the business.
A better buy?
Struggling emerging markets bank Standard Chartered(LSE: STAN) looks to be a much better turnaround candidate than BT. Shares in Standard are up by 27% over the past 12 months as sentiment towards the firm has improved. Earlier in the week, it reported pre-tax profits of $1bn for the quarter ended March 31, up 94% year-on-year, or 8% excluding one-off charges.
The firm has a tremendous opportunity ahead of it. It's estimated that by 2030, 73% of the world's middle-class population will be in Standard Chartered's footprint, compared with 36% in 2009, giving the bank a huge potential customer base.
What's more, as a growth play, Standard is hugely attractive. City analysts expect the firm's earnings per share to expand 1,273% for 2017 and then 69% for 2018. Based on these estimates, shares in the bank are trading at a forward P/E of 11.3.
All in all, it looks as if the worst is over for Standard but not for BT.
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Rupert Hargreaves owns shares of Sky. 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.