Is Purplebricks a turnaround ‘buy’ or on borrowed time?

At some point, bears could turn into bulls over Purplebricks Group plc (LON: PURP). Is that time now?

| 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.

I wrote about hybrid estate agency Purplebricks Group (LSE: PURP) in December 2018, asking the question: “Will 2019 be the year to return to Neil Woodford favourite Purplebricks?”

My conclusion back then was that, on top of being loss-making, the firm’s business is also cyclical, “and a cyclical downturn could put the company in an extremely precarious position if it arrives.” I viewed the stock as ‘risky’, and had no plans to buy.

More dire figures

Today, the company released its full-year results for the year to 30 April, and the figures are grim. Meanwhile, the share price has slipped down a further 35% or so since my December article, so I’m pleased to have avoided the stock. But what now? Is continuing to shun Purplebricks still the right decision? Let’s look deeper.

I’m discouraged by the numbers. Compared to the previous year, revenue rose 55% to £136.5m, which seems to be an outcome driven by the firm’s strategy aimed at grabbing an ever-increasing share of the market. However, the operating loss increased by 88% to £52.3m.

Call me old-fashioned, but what’s the point in that kind of trading? Imagine running a smaller business such as a corner shop like that. The firm is losing money hand over fist.

To me, there’s no point in increasing revenue unless the operating profit is rising as well. We could say that Purplebricks is effectively ‘buying’ its higher sales. Indeed, the cash in the firm’s coffers plunged by 59% during the year from £152.8m to £62.8m.

That money is gone from the balance sheet forever. I hope existing shareholders feel all the frenetic sales activity has been worth it. Maybe the enjoyment of watching the company’s funny TV ads and the brief warm glow that they got from reading about this year’s higher revenue figure is compensation enough for the plunge in the share price!

I think there’s a big flaw in the strategy

Is Purplebricks trying to follow the Amazon strategy? The US-based mega-company started off as an online bookshop and rapidly grew to sell just about everything. Famously, the company paid scant attention to profitability and focused on growing market share. For many years, Amazon remained loss-making but became profitable in the end after growing into a huge business.

But there’s a big difference between the two companies, in that Purplebricks is operating in a dreadful sector. Estate agency is notoriously cyclical and tied to the fortunes of the property market. I remember in the eighties, one particular downturn led to the call “retrain estate agents!” My view is the property market looks dangerous and I see Purplebricks as being in a precarious position.

Cyclical companies ‘should’ be making hay while the sun shines. So, right now, Purplebricks should be stuffing its bank account with cash from strong incoming cash flow. That’s because it will need it to survive the next downturn in the market, the possibility of which stands over the firm like the Grim Reaper, in my view. Sadly, the firm is doing the opposite.

I’ve run out of space, but you can read the rest of today’s report from the company here, for what it’s worth. Needless to say, I’m continuing to avoid the stock, at least until the operating loss starts to reduce.

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.

Kevin Godbold has no position in any share 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

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »