It’s been a bruising few months for Neil Woodford as big stakes in companies as diverse as roadside assistance firm AA to drug-maker Astra Zeneca have turned sour to varying degrees. But perhaps his most high profile bet to go sideways has been on subprime lender Provident Financial (LSE: PFG), whose share price has shrunk by 70% over the past year. But with Woodford still holding a large stake in this business, should retail investors bet on a big turnaround from it in 2018?
Well, the good news is that the company’s core doorstep lending division is making a rebound from a very low base. In December collections performance had increased to 78%, up from 65% in September and 57% in August as the company hired back 300 former self-employed agents on a part-time basis.
Divisional losses still came in at the high end of guidance due to the costs from the tumultuous changes in operating style. But with agents back on the street, the business is moving in the right direction again as new loans are extended and old ones are collected.
Furthermore, with the company now valued at only 7.3 times 2018 consensus earnings, there’s very little possible upside priced into its shares. Unfortunately, I believe this negativity may be warranted as the Financial Conduct Authority continues its investigation into the group’s highly profitable Vanquis credit card arm and has recently opened one into its Moneybarn auto loan division.
When the FCA opened an investigation “in relation to the processes applied to customer affordability assessments for vehicle finance and the treatment of customers in financial difficulties,” I saw reason to be nervous. It makes me believe similar issues may be lurking in other parts of the business, or at the very least that the FCA will be poking around to find them.
While I’ve long backed Provident due to its market-leading position, ability to build profitable growth throughout the economic cycle and return gobs of cash to shareholders, the combination of self-inflicted operational problems and heightened regulatory scrutiny is enough to stop me from using this opportunity to begin a stake in the business.
Growth and dividends at a low price
One Woodford holding that’s run into problems but is far more interesting to me is Card Factory (LSE: CARD). The company warned in October that it would experience little-to-no EBITDA growth for the year as it decided to absorb the costs of input and wage inflation rather than pass these on to customers.
While flat profits aren’t great, I believe this period gives it the chance to accelerate its market share gains at the expense of rivals, who unlike Card Factory don’t own their own manufacturing and thus have much higher costs.
Indeed, this process is already occurring with it posting like-for-like growth of 2.7% in the 11 months to December and total sales growth of 5.9% due to new store openings. With management targeting 50 new stores a year and same-store sales growth accelerating, I believe Card Factory’s decision will be vindicated as it pushes competitors out of the market.
This growth potential alongside industry-leading margins, low debt, a 4.65% dividend yield and low valuation of just 10.7 times forward earnings make this one Woodford holding I’d love to own for the long term.
