Should I buy this FTSE 250 stock after its 25% price crash?

The FTSE 250 stock, Provident Financial, saw it’s share price slashed by a quarter last week. But is this a buying opportunity?

| 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.

The share price of FTSE 250 stock Provident Financial (LSE:PFG) dropped sharply last week following an unexpected trading update. So what happened? And does the reduced price make Provident a bargain stock to buy now? Let’s take a look.

A worrying update

Provident is a financial services firm that provides credit facilities to individuals who are considered too risky for mainstream lenders. It currently serves more than 2.2 million customers in the UK under multiple brands. These include Vanquis Bank, Moneybarn, and Satsuma Loans.

Last week, the company revealed its latest figures, which looked fine on the surface, considering the disruptions caused by Covid-19. However, a worrying announcement was made regarding its consumer credit division (CCD).

The management team intends to enter its CCD into a Scheme of Arrangement following a significant rise in customer complaints and claims. These rising complaints have led the Financial Conduct Authority (FCA) to launch an enforcement investigation focusing on the affordability and sustainability of lending to sub-prime customers.

The Scheme of Arrangement is a court-approved measure that allows a company to restructure its capital, assets or liabilities. Assuming the FCA approves the scheme, the company will fund £50m of claims and cover up to £15m of related costs. This will ultimately ensure all legitimate claims are satisfied and provide certainty for stakeholders.

However, if the FCA decides to reject the proposal, the management team has stated that it’s CCD (which includes Satsuma Loans) will go into administration. Given this segment represents nearly 30% of revenue generation, I feel the recent drop in this FTSE 250 stock’s share price makes perfect sense. But is there an opportunity for a turnaround here? 

A FTSE 250 stock to buy now?

A FTSE 250 opportunity for growth?

Despite its CCD problems, the company is still collecting around 90% of its loans on time. Meanwhile, Provident’s other divisions appear to be recovering from the pandemic’s impact relatively well.

Vanquis Bank saw a 28% year-on-year reduction in receivables. But quarterly performance shows that it has begun returning to pre-pandemic levels at an accelerating pace. What’s more, due to reduced impairment costs, overall profitability for the segment has improved significantly. At the same time, Moneybarn, its car loan service, continued to grow receivables by 13%, in line with expectations.

It’s also worth noting that all of Provident’s segments are independent entities. In other words, if CCD were to shut down, the direct adverse effects on Vanquis Bank and Moneybarn will most likely be negligible.

The bottom line: a stock to buy now?

The investigation and potential closure of Provident’s CCD don’t inspire me with a lot of confidence, even with its other operations performing relatively well.

The surge in claims and complaints has undoubtedly damaged the firm’s reputation. And while there may not be any direct impact on its other segments, if CCD goes into administration, the firm’s relationships with its customers, creditors, and regulators will likely be permanently damaged. At least that’s what I think.

Personally, I believe there are far better investment opportunities out there in the FTSE 250. And so I won’t be adding this stock to my portfolio today.

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.

Zaven Boyrazian does not own shares in Provident Financial. 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »