Is Neil Woodford stock Provident Financial plc poised for a monster turnaround?

With its core business trending in the right direction, will 2018 be a year of huge returns for Provident Financial plc (LON: PFG)?

| 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.

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.

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.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »