Does the Safestyle share price's 20% fall make the stock a bargain?
Retailer and manufacturer of PVCu replacement windows and doors, Safestyle(LSE: SFE), has recorded a share price fall of 20% today following news of a profit warning. It comes after a difficult period for the business which has seen competition ramping up and trading conditions worsening.
Looking ahead, further challenges may be on the horizon. However, could it now offer good value for money alongside another stock which is also experiencing a difficult period?
Having reported a 25% fall in earnings in the 2017 financial year, 2018 does not appear to be improving for Safestyle. It continues to experience weak demand from consumers who have seen their disposable incomes fall in real terms in recent months. Alongside continued pressure from a new market entrant, this has meant that demand for its services has been below previous guidance.
Sensibly, the company is seeking to retain capital in case such conditions continue over a prolonged period. Therefore, it has cancelled the final dividend for 2017, while also undertaking a strategic review. Alongside this, it has appointed a new Chairman and will seek to refocus its efforts on becoming more efficient and delivering improved performance.
Clearly, Safestyle is now set to deliver a fall in earnings versus the previous year. However, it trades on a price-to-earnings (P/E) ratio of just 4 using last year's earnings. As such, it appears to offer excellent value for money, although its difficult trading conditions could last for some time.
For investors who are generally upbeat about the UK economy, there could be a value opportunity on offer. Pressure on household incomes is falling due to lower inflation, and this may provide a boost for the company. But with its share price in freefall, Safestyle is likely to be of interest to only the least risk-averse of investors at the present time.
Also experiencing a difficult period is support services company Travis Perkins(LSE: TPK). The business has recorded two consecutive years of declining profitability, and is set to report further falls in its bottom line this year. Part of the reason for this is a general slowdown in demand across its key markets, with the UK economy's growth rate having been downgraded since the EU referendum.
However, with Travis Perkins seeking to become more efficient, it is expected to return to positive growth in the current year. Certainly, growth of 5% may be relatively modest. But it would show that the business has underlying strength and is capable of performing well even in difficult market conditions.
Since the stock trades on a P/E ratio of around 13 and has a dividend yield of 3.7%, it appears to offer good value for money. With dividends being covered 2.3 times by profit, it could prove to be a strong income stock. Therefore, while potentially risky, now could be the right time to buy it.
Peter Stephens 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.