Ive been bearish onPurplebricks (LSE: PURP) for over a year. Ive had concerns about the long-term sustainability of its business model and breakneck pace of its international expansion, as well as its high valuation. However, with the shares having declined from a peak of over 500p last year, to just 180p today, has the risk/reward trade-off swung in favour of a more bullish view on the stock?
As much as my bearish stance on Purplebricks has so far played out, my bullish stance onCapita (LSE: CPI) has, to date, proved woeful. Having rated the stock a risky buy at 160p in June and at considerably higher prices previously the shares are now trading at a dismal 130p. Do I still see Capita as a good higher-risk buy, or have events since June changed my view?
More questions than answers
Purplebricks issued a trading update yesterday, ahead of half-year results scheduled for 13 December. At the time of its last annual results, management gave guidance on its revenue expectations for this year (the companys financial year ends 30 April 2019). That guidance was for 165m-185m and I noted in an article at the time that the consensus among City analysts was towards the top end of the range, at 183m.
Management reiterated the guidance in yesterdays update. However, over the last few months, the City consensus has moved to the bottom end of the range, and currently stands at 167m. The company gave no concrete revenue numbers for the first half of the year. It did say UK revenue had grown approximately 20% year-on-year, from which we can deduce a rise to around 56m. But with no clues to first-half revenues in its international markets, its impossible to calculate what the group has to achieve in the second half of the year, and to assess the risk of a revenue miss.
With the trading update raising more questions than answers, I cant see the stock soaring anytime soon and Im minded to avoid it at this stage. The numbers in next months results will tell us more.
Recovery play
I was long bearish on the outsourcing sector, but viewed Capita as the strongest of a bad bunch. That its done better than Carillion isnt much of a boast. Were now looking at a business thats been through the mill and a stock thats a potential recovery play.
When I wrote about the company in June, my optimism was based on a number of factors, including management changes, disposal of non-core assets, and winning new contracts. I felt the Carillion collapse could lead to more sustainable contracts, enabling Capita in time to make decent margins on its multi-billion revenues.
Whether that will play out remains to be seen. But margins should certainly improve as a result of management having identified a significant multi-year opportunity to reduce costs and improve operational efficiency.
My optimism has been further bolstered by the company saying in August that disposals of non-core businesses are ahead of plan, as well as by positive contract news in more recent months. This includes re-selection for a 65m contract with Westminster City Council, announced today. With the shares trading at less than 10 times forward earnings, I continue to rate the stock as a good, if higher-risk recovery buy.
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