10 reasons I’d sell Purplebricks Group plc

G A Chester offers a bear view on Purplebricks Group plc (LON:PURP).

| 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.

The bull case for ‘hybrid’ estate agency Purplebricks (LSE: PURP) is quite simple: Its business model is sweeping all before it in the UK. It’s already proving a success in Australia and is now being rolled out in the massive US market. The shares are worth buying at almost any price.

But here are 10 reasons why I’d sell the shares today.

1. In March 2014, Property Industry Eye published Purplebricks’ profit projections from a private funding brochure: a maiden profit of £17.6m for fiscal 2015, followed by £24.9m for fiscal 2016. By the time it floated in December 2015, a maiden profit was not forecast until fiscal 2017: a research note (17/12/15) issued by Hardman & Co (paid fees by Purplebricks, so presumably not far off the company’s own projection) forecast £8m. Purplebricks posted a pre-tax loss of £6.1m. And even when the cost of entering the Australian market that year is stripped out, it still missed the £8m profit forecast by a mile. The latest from Hardman (September 2017) is for a maiden profit of £7m in 2019.

Should you invest £1,000 in Wise Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Wise Plc made the list?

See the 6 stocks

2. Purplebricks also fell short of Hardman’s December 2015 projection of £49.2m revenue for fiscal 2017. The miss was £6m, excluding Australian revenue, which wasn’t in view in December 2015. The company has undoubtedly shaken up the UK market, but do revenue and profit projection misses (plus the timing of the move into Australia, and recently the US) suggest all isn’t entirely rosy?

3. The company reported an 83% ratio of instruction-to-sale-agreed (disingenuously called “instruction to sale”) in its fiscal 2017 prelims. What it doesn’t disclose is how many of its instructions reach completion (without the involvement of another estate agent). According to my calculations, if the average price of the properties it handles were near to the UK average, the instruction-to-completion ratio would be in the region of 63%. And, if that were the case, there would be quite a number of unhappy punters undermining by word of mouth the advertising campaigns at which Purplebricks is throwing increasing amounts of cash.

4. The company trumpets hugely positive ratings on Trustpilot, but other review sites, including allAgents.co.uk, tend to have a higher proportion of negative reviews. allAgents has been threatened with legal action by Purplebricks.

5. Whatever the rights and wrongs of the review websites controversy, allAgents isn’t the only recipient of lawyers’ letters from Purplebricks. In my experience, companies that routinely use this means to seek to suppress negative comment or critical debate usually make for poor investments.

6. Disingenuousness, casual breaches of minor rules and regulations, and other arguably de minimis matters of integrity can be symptomatic of a deeper malaise in the culture of a company. Purplebricks concerns me. One of too many examples for my liking: AIM companies are required to update their shares in issue and major shareholders on their website at least every six months. Currently (29/9/17, 15:30), Purplebricks hasn’t updated the information since 17 December 2015.

7. Competition is hotting up: Other UK hybrid upstarts, such as easyProperty and Yopa, are already replicating the Purplebricks offer.

8. There’s no track record of how the upfront fixed-fee business model performs in a slow housing market.

9. Historically, the US market has been incredibly tough to crack for British consumer-facing businesses. Many have ultimately retreated with their tails between their legs.

10. With a market cap of over £1bn and trading on 23 times fiscal 2017 sales and 11 times company-guided fiscal 2018 sales, there’s very little room for anything other than high hopes being met.

For these and other reasons, it’s a sell for me. For keen holders, it may be prudent to “dance near the door”.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

G A Chester 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.

More on Investing Articles

Investing Articles

If an investor put £10k into Greggs shares one month ago, here’s what they’d have today

Greggs shares have had a tough year but Harvey Jones says they're notably cheaper as a result, while the dividend…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

The Phoenix share price jumps 7.5% on today’s results, but still yields a stunning 9.4%!

Harvey Jones put his faith in the Phoenix share price and this morning was rewarded with a 7.5% jump on…

Read more »

Investing Articles

What’s been going on with the Barclays share price?

The rising Barclays share price reflects confidence in management’s strategy to improve business performance and enhance shareholder returns.

Read more »

Investing Articles

Prediction: in 1 year, the IAG share price could reach as high as…

The IAG share price has almost doubled in the last 12 months, but can this momentum continue in 2025? Zaven…

Read more »

Investing Articles

Prediction: in 12 months, here’s where the Glencore share price could be…

The performance of Glencore’s share price has been lacklustre, to say the least. But could all that change over the…

Read more »

Investing Articles

See how much an investor needs in their ISA to earn a £499 monthly second income

Harvey Jones crunches the numbers to show how it's possible to build a long-term second income by investing in a…

Read more »

Investing Articles

I’m considering buying more of this struggling FTSE 100 stock

This FTSE 100 stock hasn't exactly set our writer's portfolio on fire during the time he's owned it. But Paul…

Read more »

a couple embrace in front of their new home
Investing Articles

Prediction: in 1 year, the Taylor Wimpey share price could reach…

Can Britain’s reformed planning scheme send the Taylor Wimpey share price into overdrive? Here’s what the latest analyst forecasts predict.

Read more »