Are Dignity plc and Provident Financial plc poised for a monster turnaround?
The share price charts of funeral specialist Dignity(LSE: DTY) and doorstep lender Provident Financial(LSE: PFG) make equally shocking reading. Both have suffered a cliff-edge slump in the past year, losing around half their value in a single day. Both trade roughly 70% lower than 12 months ago. Monster drops like these are often followed by monster turnarounds. Is now the time to buy them?
Dignity may be the UK's only publicly traded funeral services provider, but this is a competitive market nonetheless. It crashed more than 50% last month after issuing a profit warning, saying that it would have to cut the price of its simple funerals by 25% and freeze the cost of traditional ceremonies due to a funeral plan price war. This followed a similarly painful warning in November. Dignity has now lost three quarters of its market cap, trading at 740p against its year high of 2,791p.
The £390m business has been hit by the squeeze on consumer pockets, which now extends all the way to the grave. However, it will tempt many because the bad news is out there and now the onus is on management to put things right. It has responded by announcing a "rigorous review" to ensure its funeral operations are run more efficiently. Now could be a good entry point.
Today's valuation is tempting, but you must also brace for further volatility, with earnings per share (EPS) forecast to fall by 46% across 2018, then another 1% in 2019. Dignity currently trades at a forecast p/e ratio of 11.9 times earnings for 2018, with a forecast yield of 3.1%. However, that dividend is expected to come under pressure. We will know on 14 March, when 2017 finals are published.
The bad news is out there but be warned, several activist investors say there is more to come. Dignity management's view that selective acquisitions of well-established funeral businesses are an appropriate use of capital could prove risky in a challenging market. Remember, it's your funeral.
If you thought Dignity was cheap, Provident Financial is even cheaper, trading at a forecast 7.6 times earnings after losing two thirds of its value last year. Last year was traumatic, but my foolish colleague Rupert Hargreaves has suggested this stock's share price could triple in value.
Again, you will have to be brave, with Provident potentially on the hook for a £300m fine from the Financial Conduct Authority, which is investigating its credit card and car financing divisions. This could overwhelm its £100m cash and debt stockpile.
Trouble in store
Provident Financial remains a high risk/high reward play. I have become increasingly wary of investing in companies that have issued profit warnings, because they seem to have a habit of going from bad to worse. Rising interest rates, stagnating wages, stubborn inflation and a struggling economy could put its credit customers under greater pressure, increasing bad debts.
On the other hand, City analysts can see Provident Financial's EPS jumping 83% in full-year 2018 and another 46% next year. Customer numbers and debt collection rates are both rising. But you should still prepare yourself for potential nasty surprises with both of these stocks.
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Harvey Jones has no position in any of the 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.