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This FTSE 250 stock just crashed 25% on its results. I’d buy it

G A Chester
Businessman looking at a red arrow crashing through the floor

On a rare up day for the market, FTSE 250 stock G4S (LSE: GFS) has crashed 25% to 100p. This comes on the back of the security specialist’s annual results. Shortly, I’ll tell you why I’d be happy to buy the stock today.

Firstly, I want to look at another double-digit faller on its results release, FTSE SmallCap firm Dignity (LSE: DTY). This is the UK’s only listed owner of crematoria and provider of funeral-related services. On the face of it, it’s an attractive defensive business. But would I buy into it today?

Transformation

Dignity’s share price dived as much as 22% to 390p in the first hour of trading. This is a level not seen since 2005, and a far cry from its heyday highs of well north of 2,000p between 2015 and 2017. What’s gone wrong?

In short, Dignity upped its prices well ahead of inflation for many years. This was derailed by the growing popularity of lower-priced, simpler funerals. As a result, the company’s undergoing a wholesale transformation.

However, management said today it’s “adapting and pausing certain aspects of the transformation… which will delay anticipated cost savings.” The reason for this is it’s awaiting the outcome of an investigation into the industry by the Competition and Markets Authority (CMA) later this year.

Outlook

Meanwhile, the company reported an underlying 5% fall in revenue and 29% drop in earnings for 2019. The shares trade at a bargain-basement price-to-earnings (P/E) ratio of 6.5. However, earnings are set to be lower in 2020, due to management’s expectation of “further downward pressure on average income per funeral and cremation,” and the delay to the previously anticipated cost savings.

I believe Dignity can ultimately deliver sustainable growth from a rebased pricing level, and may even benefit at the expense of competitors from the CMA investigation. On this basis, and because I like the defensive qualities of the industry, I tentatively rate the stock a long-term ‘buy’.

Mixed news

I wrote about G4S last week after announcing it had agreed to sell the majority of its conventional cash-handling business for £670m. I said I was a little disappointed by the price, and the fact it wasn’t a sale of the entire cash-handling business. However, I concluded: “We’ll know more from the company’s annual results next week, but I see value in the stock.”

The number making the headlines in today’s results is a statutory loss of £91m. However, the company booked a £291m non-cash charge for goodwill impairment, mainly relating to its retained UK cash-handling business. The group’s underlying performance was reasonable, in my view. Earnings were up 0.8% on 4.7% higher revenue, and operating cash flow was up 8.8%.

Too cheap

The stock trades on a P/E of 5.9, based on underlying earnings. It also offers a yield of 9.7% on an unchanged dividend, covered a healthy 1.75 times by the earnings.

G4S is a global market leader in security. I think it has bright growth prospects, due to the calibre of its secure solutions and retail technology solutions businesses, and what the company calls “the long-term, fundamental strength of the global security market.”

As such, I’d buy this FTSE 250 stock today, because I think the valuation is simply too cheap.

The post This FTSE 250 stock just crashed 25% on its results. I’d buy it appeared first on The Motley Fool UK.

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G A Chester has no position in any of the shares 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.

Motley Fool UK 2020