After crashing 40% last month, is this stock now the biggest bargain in the FTSE 250?
Many analysts view the FTSE 250 as undervalued. While not every stock in the UKâs flagship growth index is firing on all cylinders, there seems to be a notable gap between rising earnings and modest valuations.
As such, itâs suspected that there are several value opportunities lurking within the index. And one stock thatâs recently gained a lot of attention is WH Smith (LSE:SMWH).
The travel retailer recently saw its market-cap collapse by over 40% last month after the business announced an accounting error had led it to overstate its North American profits by £30m. Needless to say, thatâs quite problematic.
However, some analysts believe the reaction from investors was overblown, potentially creating yet another potential hidden value-buying opportunity. So could WH Smith secretly be one of the best bargain buys to consider right now?
Digging deeper
The accounting issues stem from the group recognising supplier income too quickly, ultimately reporting £30m of profits that had yet to materialise. For a £1.4bn enterprise at the time, overstating £30 of profit, while bad, may not seem like a disaster on the surface.
However, itâs important to realise that WH Smith doesnât exactly have beefy margins. And because of this financial hiccup, management’s cut its full-year 2025 pre-tax profit guidance down to £110m. Assuming the ongoing review by its auditor Deloitte doesnât reveal more problems, that represents a 34% drop versus the £166m recorded in its 2024 results.
Negative accounting errors donât help bolster investor confidence. Even less so in the case of WH Smith, where its North American operations are a central part of its growth strategy. And with that in mind, itâs not surprising to see the FTSE 250 stock crash, bringing its market cap down to around £870m.
But, with the damage now done, could this sharp sell-off have created a potential buying opportunity for long-term investors?
Investigating the potential
Assuming no more skeletons fall out of the firmâs closet, there are some reasons to be excited for WH Smithâs potential. Its recent divestment of its UK high street stores allows management to focus more exclusively on travel retail outlets in airports and train stations â locations guaranteed to have high footfall.
Whatâs more, the recent setback in North American profits may ultimately be temporary as the overstated gains are expected to eventually materialise in cash flow. That opens the door to a potential earnings recovery in the medium term, supporting a share price recovery.
Thereâs also the possibility of an activist-driven rebound. Activist investors may view the recent plunge as an opportunity to secure influence on the board and force managerial changes, potentially helping to restore investor confidence and generate fresh share price momentum.
There are no guarantee of this, of course. But with the stock now trading at a cheap earnings multiple, even with the downward revision to full-year profits, a rebound may not be completely unrealistic.
To buy or not to buy?
While it may be tempting to view the recent share price crash as a buying opportunity to consider, I remain unconvinced. A deeper dive into WH Smithâs finances by auditors could reveal more problems. And until investors know exactly whatâs going on with this FTSE 250 stockâs finances, buying the shares today feels more like speculation than intelligent investing.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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.
