Is it finally time to buy this Neil Woodford favourite after falling 15% in two months

Outsourcing group Capita(LSE: CPI), which used to be a favourite of Neil Woodford, is working flat out to rebuild its reputation. After a series of missteps that took the firm close to bankruptcy earlier this year, the company is now out of hot water, but there’s still plenty of work to do.

The question is, should investors buy into this recovery story today or is it worth staying away for longer?

Time to buy?

After a £681m rights issue and a series of asset sales, including the £235m divestment of its parking management business ParkingEye to Macquarie Principal Finance (announced today), Capita is no longer on the brink. However, the group is not expected to return to growth any time soon. Analysts are forecasting a decline in earnings per share of 47% to 14.4p for 2018, and a further decline of 8% to 13.3p for 2019. These estimates put the stock on a forward P/E of 9.5 for 2019.

While a forward P/E of 9.5 might look cheap, I think it’s about right for a business that’s still selling assets to shore up its balance sheet with no earnings growth expected for the foreseeable future. And after suspending its dividend back in January, investors don’t even have a token dividend payout to keep them happy as the recovery continues. With this being the case, I’m not a buyer of Capita after recent declines, although my Foolish colleague G A Chester seems to disagree.

The comeback trail

One Neil Woodford stock that I am interested in, however, is Provident Financial(LSE: PFG). Just like Capita, this company has recently fallen on hard times and management had to undertake a rights issue earlier this year to shore up the balance sheet. After the £331m capital raise, which was less than many analysts have been predicting, the City is expecting the group to report a sharp recovery in income by 2019.

Unlike at Capita, EPS are projected to fall 81% in 2018, but then surge 25% in 2019. On this basis, the shares are changing hands for 8.6 times forward earnings.

And as well as the attractive valuation, analysts are forecasting a dividend paid per share of just under 43p for 2019, giving a dividend yield of 7.7% on the current share price.

So, Provident is both expected to return to growth next year and reward shareholders with a market-beating dividend yield.

Recovery on track

A recent trading update confirmed that it is on track to return to growth before the end of the decade. At the end of the third quarter, Provident’s credit card business Vanquis Bank reported a 6.3% increase in customer numbers to 1.8m. Efforts to stabilise the door-to-door home credit card also appear to be paying off, although collections are still below historical levels according to management.

Nevertheless, it looks to me as if Provident’s overall recovery is well under way and investors should be well rewarded if the group can continue on its current trajectory, and hit City growth numbers for the next few years. I see no reason why the company would not be able to meet the City’s future growth targets at this point.

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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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