How on earth is this FTSE 250 stock below its Covid-19 levels?

Shares in FTSE 250 retailer WH Smith (LSE:SMWH) are down 55% over the last five years. But the UK was in a national lockdown in November 2020 – how can things be worse now!?

An accounting irregularity caused the stock to crash this year, but the firm’s position is now a lot clearer. And with the stock still near its lows, I think it’s worth a look.

Travel retail

In the last year, WH Smith has sold off its UK high street stores to focus on its more profitable travel operations. At least they looked like they were more profitable. 

Unfortunately, the firm’s US division was incorrectly accounting for income from suppliers. When this emerged, the stock fell 42% in a day and an investigation immediately followed.

The results of the audit were released on Wednesday (19 November). And the news is that trading profits in WH Smith’s US division are expected to be between £5m and £15m this year.

That’s way off the firm’s initial £55m forecast and even below the revised guidance of £25m. But the share price climbed 7% in response as a result for two main reasons. 

The current situation

One reason for the positive response is that the market’s finally in a position to start thinking seriously about the stock again. That’s just not possible if the reported numbers aren’t right.

Intelligent investors can disagree about whether a result is good or bad or which metrics are the most important. But if the numbers aren’t accurate, none of this matters. 

The auditor also confirmed that the problem is “substantially a timing rather than an existence issue”. In other words, some of the profits are delayed – not lost – and this is a good thing.

In its update, WH Smith said that around £20m of the income is expected to be recognised in future years. And further guidance is coming when the firm reports next month.

Where are we now?

With the issues now in hand, investors are in a position to take a proper look at WH Smith again. And I think there’s quite a bit to like about the business at this point. 

Focusing on its travel outlets looks like a very good move to me. Its venues now face limited competition from other retailers and almost none from the threat of e-commerce. 

Profits for the fiscal year ended in August are now expected to be between £100m and £110m. With the firm’s market value and net debt, that implies a valuation multiple of around 11. 

That’s not particularly high. And with the uncertainty around the company’s accounting irregularities now largely out of the way, I think the stock is worth considering.

New beginnings

As part of the investigation, CEO Carl Cowling announced his resignation. That means WH Smith is – for the time being, at least – without a permanent leader. 

This is the kind of uncertainty that inevitably brings risk. Getting the right person in to restore trust in the company will be important.

Overall though, a clear reset is probably what’s needed. But I think whoever comes in to take charge of the restructured organisation will have an interesting business to work with.

The post How on earth is this FTSE 250 stock below its Covid-19 levels? appeared first on The Motley Fool UK.

More reading

• Down 43% in 3 months! Does today’s news mean the WH Smith share price is now in bargain territory?
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• 3 UK shares that could be set for big moves in November

Stephen Wright has positions in WH Smith. 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.

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