The collapse of Capita (LSE: CPI) is a reminder (if you needed one) that you can lose large sums on the stock market as well as make them.
Woodford woe
In the summer of 2015, its share price briefly topped 800p. Today, it lurks around the 120p mark, having lost 85% of its value. The stock was a favourite of fund manager Neil Woodford but now stands as another black mark against his name. Some people like to go shopping for stocks like this one, should you?
The FTSE 250 business services and outsourcing group published its full-year 2018 results today which saw pre-tax profits fall 26% to £282m. This was actually better than expected, given that guidance suggested a lower range of £250m-£270m.
Falling debt
Debt fell from £1.1bn to £466m, helped by the £701m gross proceeds from a rights issue and £408m from disposals. Capital has also embarked on a phased pension deficit reduction plan, which will cost it around £176m.
Chief executive Jon Lewis said the group had successfully completed year one of its multi-year transformation, fixed the basics, and is now firmly on track. “We’ve strengthened our balance sheet, achieved cost savings, and invested in our people.”
The transformation has some way to go, but Lewis sees significant structural growth in providing digitally-enabled services and software solutions. So is this a recovery you can believe in?
Recovery position
The £1.97m company has been slashing costs and offloading assets to create a simplified and strengthened operation, but still has a long way to go. It looks cheap, trading at 8.8 times earnings, despite a 23% share price recovery over the last year.
Earnings are forecast to fall another 25% this year, the fourth successive drop. But next year could see a 29% bounce, so there’s hope. By then, the dividend may even be back, although the yield will be just 0.6%. Capita’s road to recovery looks set to be a long one, but my Foolish colleague G.A. Chester rates it a buy.
Rogue Mail
Royal Mail (LSE: RMG) has had a massively volatile time of late. It currently trades at just 261p, way off its 52-week high of 632p. Those who claimed the Government under valued the stock at flotation got things the wrong way round.
This will alert many to the possibility of a bargain, with the group trading at just 10.2 times forecast earnings and a lowly price-to-revenue ratio of just 0.2. Be warned, earnings are forecast to fall 42% in the tax year to 31 March 2019, and another 5% the year after.
Profit problems
The big temptation is its massive forecast yield of 9.1%, albeit with wafer thin dividend cover of 1.1. Inevitably, there has been talk of a dividend cut, although even if it was slashed in half you would still have a decent level of income.
Royal Mail faces long-term problems, such as the decline of letters, offset by steady growth at its UK parcels arm and the international Global Logistics Systems (GLS) business. There was also that shock profit warning in October. I’m drawn to its low valuation and dizzying yield, but management faces a massive task responding to a changing world where Royal Mail has yet to find its place.
