Is this Neil Woodford stock a falling knife to catch after dropping 15% today?

Roland Head takes a look at the latest casualty in the Woodford portfolio and suggests an alternative.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Things aren’t getting much better for fund manager Neil Woodford. Today has seen another of his fund’s stocks, private hospital operator Spire Healthcare (LSE: SPI), fall by more than 15% after a surprise profit warning.

Despite this sharp fall, the group’s underlying business seems fairly healthy. So is this falling knife a potential buy?

Spire needs the NHS

Simon Gordon, chief executive of private hospital operator, believes in a “medium-to-long term growth opportunity in UK private healthcare”.

I suspect Mr Gordon is correct, but the firm’s recent growth appears to have been driven by NHS referrals. These account for about 31% of revenue, but are now falling. This decline forced Spire to issue a profit warning with its half-year results this morning, triggering a sharp sell-off.

Revenue during the second half of the year is now expected to be flat, with profit margins slightly lower than last year.

It’s not all bad

Today’s half-year results weren’t that bad. Revenue rose by 2.4% to £481m, while earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 1.5% to £83.2m.

Net debt was broadly flat at £436m, despite the firm spending £59.5m on new hospitals. This seems to support Spire’s claim of strong cash flow performance, with a reported 97.6% of EBITDA converted to cash.

Just one problem

Nearly a third of Spire’s revenue comes from NHS referrals. About 45% comes from health insurance referrals. Self-pay — where patients without health insurance choose to pay for a procedure — accounts for about 20%.

Today’s results suggest that insurance revenue is flat and warn of a slowdown in NHS referrals. The only hope seems to be self-pay, where revenue rose by 14% during the first half.

My concern is that self-pay growth may not be strong enough to make up for shortfalls elsewhere. I estimate that the shares trade on a P/E of around 16 after today’s slide. I’m not sure that’s cheap enough to justify a buy. I’d stay away until we learn more about trading conditions later this year.

A sure thing?

One of Neil Woodford’s biggest holdings is tobacco giant Imperial Brands (LSE: IMB).

The group’s share price has lagged the FTSE 100 this year, dampening the performance of Woodford’s big income funds. But in this case at least, I’m fairly confident that Mr Woodford’s faith in Imperial is likely to be rewarded.

The tobacco group’s shares are currently trading at a two-year low, having fallen by 16% over the last year. But I think the stock may be reaching a level at which it looks distinctly undervalued.

Imperial’s free cash flow remains formidable. It’s worth noting that the group has used its surplus free cash flow after dividends to repay £1.2bn of debt over the last 12 months. The group’s commitment to 10% annual dividend growth remains in place and a payout of 171p is expected this year, giving a prospective yield of 5.2%.

The stock currently trades on just 12 times forecast earnings for 2017. This compares favourably with rival British American Tobacco, which trades on a forecast P/E of 17 with a yield of just 3.8%. In my view, Imperial could be a sound buy at current levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »