Why I'd avoid this falling knife following today's 15% slump

Shares in property services company Countrywide(LSE: CWD) are sliding once again this morning after the firm issued yet another poor trading update.

According to today's update, total group income is now expected to be approximately £672m, down 8.8% year-on-year. Company earnings before interest, tax, depreciation, and amortisation are expected to slide 22% to £65m for the year.

Most of the pain has come from the group's sales and letting arm. Here total income is expected to slide 14% year-on-year with revenue from the UK business down 17%. Income from home sales and letting in London is down 10% year-on-year to £155m. Income from the London market accounts for 75% of the UK total.

EBITDA for the whole sales and letting arm is expected to fall 45% to £26m "as a result of the changes in the sales and lettings structure made over the last 12-24 months."

Thanks to slowing transaction volumes in estate agency, income from the firm's financial services business is set to fall from £22.6m to £20m.

The one part of the Countrywide group that is showing growth is the business's B2B division. This arm should now report EBITDA growth of 14% to £36m for the year.

From bad to worse

Over the past few years, Countrywide has continually disappointed the market. After its IPO in 2013, the shares popped to a high of 686p in 2014 as investors bought into the firm's growth story. However, after peaking at £68m in 2014, net profit has steadily declined. For 2016, the group reported only £17m of net income, down 75% from the peak. Over the same period, the value of Countrywide's shares has declined by nearly 80%.

And it looks as if life is only going to get harder for the estate agent. The latest housing surveys indicate that home price growth in the UK is slowing, and in London, prices are falling at the fastest rate since the financial crisis. According to the Land Registry, the number of property transactions decreased 15.8% year-on-year to the end of August. Across the UK, the number of property transactions was down 12.9% annually during September 2017.

So, it looks as if Countrywide is going to have to work harder to make money going forward. Unfortunately, the group is also highly leveraged, which to me is a big red flag.

Weak balance sheet

According to today's trading update, it is expecting to generate £59m of operating cash flow during 2017. Some of this has been used to pay down debt. However, net debt is still likely to be £193m at the end of the year (down from £248m last year). Even though management says it is "committed to reducing leverage further in the medium term," heading into a cyclical downturn with a weak balance sheet is, in my view, a perilous situation as it places financial constraints on the business.

So overall, even though shares in Countrywide look cheap as they currently trade at a forward P/E of 9, I would avoid the business as it's likely there will be further pain ahead for investors in the next few years.

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Rupert Hargreaves owns no share 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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