Hunting for overlooked growth and value stocks can be a profitable strategy. Today I’m going to compare a media stock you may not have heard of with growth star Purplebricks Group (LSE: PURP).
Which of these is more likely to help you achieve financial independence?
A hidden gem?
You probably haven’t heard of Wilmington (LSE: WIL). But it’s been listed on the LSE since 1995 and has a market cap of about £200m. The group’s business is centred on providing training and education services in growth areas such as financial risk and compliance.
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The company published its financial results for the year ended 30 June this morning. Revenue for the year rose by 14% to £120.3m and the group’s adjusted pre-tax profit rose by 5% to £21.4m.
Adjusted earnings per share of 19.05p were in line with forecasts, as was the 5% increase in the total dividend for the year. But despite this apparently solid set of results, the group’s shares are down by around 7% at the time of writing.
What’s wrong?
The main risk seems to be that the firm’s profit margins will fall next year. Management expects the group’s operating costs to rise by a total of £1.65m this year. This is due to investment in new technology the greater cost of the group’s new, rented offices.
Analysts had been forecasting earnings growth of about 20% in 2017/18. I suspect that these forecasts will be reduced based on today’s cost guidance.
Strong cash generation
Wilmington’s profits are quite complex, with a lot of adjusting items. But what we really need to know is whether the business generates surplus cash reliably.
My calculations show that, excluding acquisitions and property sales, the firm generated free cash flow of about £14m last year. This covered last year’s dividend payout of £7.2m twice, leaving surplus cash to put towards acquisitions and debt repayments.
The risk is that the firm may be overspending on acquisitions. But with a trailing price/free cash flow ratio of 13.5 and a dividend yield of 4%, I think the shares look reasonable value.
What about Purplebricks?
Shares of online estate agent Purplebricks have risen by 196% so far this year. So the fact they’ve fallen by 20% from their August high of 514p isn’t that surprising.
However, what does worry me is that just when the group was due to start making a profit, management decided to splash £50m on an attempt to break into the US property market. This initial sum will be used to test the waters in California.
The group now has nearly 500 Local Property Experts in the UK and is now due to start recruiting “hundreds” in California. I expect costs to rise sharply, potentially swamping what little profit is being made in the UK.
The risk of a setback is higher because these shares are already eye-wateringly expensive. Purplebricks currently trades on a multiple of 23 times forecast sales, even though it’s expected to report a loss this year.
In my view this valuation doesn’t discount the many risks facing the firm, including more aggressive competition from traditional full-service estate agents. This one could go either way, in my view. That’s why these shares are too speculative for me.
