A week of woe for non-standard lender Provident Financial (LSE: PFG) has brought out the bargain hunters, bottom fishers and falling knife catchers. That is what happens when a company issues its second profit warning in two months, scraps its dividend, sheds its chief executive and sees its share price drop 66% in a day, which wiped £1.7bn off its stock market value on Tuesday.
Sub-prime investment
The turnaround was almost as swift. Provident Financial’s share price bounced 13.16% on Thursday, then another 20% on Friday morning, although it still trades 70% lower than a year ago. The UK’s largest sub-prime lender is no longer a falling knife and the question now is this: are we seeing a dead cat bounce?
Provident Financial’s collapse has flushed out the contrarians, position-coverers and opportunity seekers, many of whom will have been tempted to part with their money by surprisingly positive commentary about the group’s future. Star fund manager Neil Woodford is publicly standing by his stock pick, claiming the doorstep lender will be around for decades and is now seriously undervalued. Markets retain faith in Woodford’s long-term stock picking abilities, despite his recent travails.
Cat people
My problem is that the well-documented problems in Provident Financial’s home credit division are not just skin deep, but cut right to the bone. The firm has slashed the division’s value to zero amid reports that its credit collectors are looking to join rivals, and take their best clients with them. It has massive technical problems, and is under huge pressure to fix them quickly as rivals circle. Newly appointed managing director of its consumer credit division, Chris Gillespie, has his work cut out.
Valuation metrics also need to be treated with caution. Personally, I’m not putting too much faith in a forecast 21% rise in earnings per share for 2018. There could be more trouble ahead. The full-year dividend looks doomed as Provident Financial shores up its capital base. This is a gamble. You could win big, especially if the firm attracts US or European predators, but last week was the time for nimble traders to take advantage and that moment has now passed. I fear this dead moggy could soon lose its bounce.
More alive than dead
I am more tempted by advertising giant WPP (LSE: WPP) whose stock plunged more than 10% on Wednesday. Markets reacted badly to half-year guidance warning of slightly weaker than expected top-line growth and lower full-year like-for-like sales, due to weaker spending by consumer goods firms. Friday morning’s share price of 1,435p is 34% below its year high of 1,928p.
Yet it looks to me that the sell-off may have been overdone, given that WPP also reported 124.7% jump in profits after tax to £634m, and an interim dividend of 22.7p, pipping the anticipated 22p. I’m with analysts at Macquarie who saw Wednesday as an “extreme reaction“. I am content with forecast earnings per share growth of 9% in 2017 and 6% in 2018, and a forecast yield of 4%. For a long-term buy and hold, today’s forecast valuation of 12.4 times earnings looks a good entry point.
